Chapter 4 Quiz Review Flashcards
On December 1, 2023, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2023 and $12,000 for January 2024. Daniel must include the $24,000 in 2023 gross income. True or False?
True. Both payments must be included in Daniel’s 2023 gross income. Prepaid rent income cannot be deferred until earned.
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. 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. True or False?
True. The royalties must be included in the gross income of Fred, the taxpayer who earned it.
ABC Corporation declared a dividend for taxpayers of record as of December 24, 2022. The dividend checks were mailed on December 31, 2022. Ed, a cash basis shareholder, received the dividend check on January 2, 2023. Ed can delay reporting the income from the dividend until 2023. True or False?
True. The income was not available to Ed until 2023.
The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but he withdrew only $60,000 during the year. Bryan’s gross income from the partnership for the year is $60,000. True or False?
False. The income from the partnership is recognized by the partners whether or not the partners receive any assets from the partnership during the year. Bryan’s share of the profits is $70,000 (50% x $140,000).
Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income. True or False?
False. The loan is classified as a gift loan. Since the amount of the loan is greater than $10,000, the imputed interest rules apply. However, since the loan is not greater than $100,000, the imputed interest is limited to Son’s net investment income of $1,600.
Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year) or two years in advance ($960). In September 2023, the company collected the following amounts applicable to future services:
October 2023-September 2025 Services (200 two-year contracts) for $192,000
October 2023-September 2024 services (200 one-year contracts) for $120,000.
Total= $312,000
As a result of this, Orange Cable should report as gross income for 2024, the year following receipt:
A) $54,000
B) $78,000
C) $258,000
D) $312,000
$258,000
Rationale: For financial reporting purposes, Orange will report three months of each of these contracts in 2023:
Two year contracts: 200 x 3 months x $40= $24,000
One-year contracts: 200 x 3 months x $50= $30,000
Total Revenue for 2023= $54,000
Under the income deferral rule for an accrual method taxpayer, the balance of the prepaid income must be reported in the subsequent year ($312,0000-$54,000= $258,000).
With respect to the unearned income from services, which of the following is true?
A) The treatment of unearned income is the same for tax and financial accounting for accrual basis taxpayers.
B) A cash basis taxpayer must report all of the income in the year received.
C) An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt.
D) An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
A cash basis taxpayer must report all of the income in the year received.
Rationale: Answer A is incorrect because the income is recognized over the period it is earned for financial reporting purposes regardless of the length of the period. For tax purposes, deferral of recognition is limited. Answers C and D are incorrect. An accrual method taxpayer may adopt a method for prepaid service income to report the same amount on its tax return as is reported on its financial statements for the year of receipt with the balance reported on the subsequent year’s tax return.
Daniel purchased a bond on July 1, 2023, at par of $10,000 plus accrued interest of $300. On December 31, 2023, Daniel collected the $600 interest for the year. On January 1, 2024, Daniel sold the bond for $10,200.
A) Daniel must recognize $300 interest income for 2023 and a $200 gain on the sale of the bond in 2024.
B) Daniel must recognize $600 interest income for 2023 and a $200 gain on the sale of the bond in 2024.
C) Daniel must recognize $600 interest income for 2023 and a $100 loss on the sale of the bond in 2024.
D) Daniel must recognize $400 interest income for 2023 and a $100 loss on the sale of the bond in 2024.
Daniel must recognize $300 interest income for 2023 and a $200 gain on the sale of the bond in 2024.
Rationale: The $600 collected consists of $300 of gross income for the interest earned from July 1 through December 31 and $300 of accrued interest that was purchased. The cost of the bond was $10,0000; thus, Daniel has a $200 gain ($10,200- $10,000) on the sale.
Mark, a calendar year taxpayer, purchased an annuity for $50,000 in 2022. The annuity was to pay him $3,000 on the first day of each year, beginning in 2022, for the remainder of his life. Mark’s life expectancy at the time he purchased the annuity was 20 years. In 2024 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.
A) If Mark dies in 2024, a loss can be claimed on his final return for his unrecovered cost of the annuity.
B) If Mark dies in 2025, his returns for the two previous years can be amended to allocate the entire cost of the annuity to the years in which he received payments and reported gross income.
C) If Mark is still alive at the end of 2024, he is not required to recognize any gross income because of his terminal illness.
D) If Mark is still alive in 2024, his recovery of capital for that year is $500.
If Mark dies in 2025, a loss can be claimed on his final return for his unrecovered cost of the annuity.
Rationale: Mark’s final return can report a loss in 2025 because he did not recover all of his cost of the annuity prior to his death. Answer B is incorrect because the cost is recovered in the year of death. Answer C is incorrect as Mark must recognize income each year he receives a payment until he recovers his entire investment. Answer D is incorrect because Mark would have recovered his entire cost of the contract in the first 20 years under the contract, 2022-2041.
Betty purchased an annuity for $24,000 in 2023. Under the contract, she will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.
A) If Betty collects $3,000 in 2023, her gross income is $630 (0.03 x $21,000).
B) Betty has no gross income until she has collected $24,000
C) If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income.
D) If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000- (60 x $300) = $6,000] on her final return.
If Betty lives to collect more than 96 payments, all of teh amounts collected after the 96th payment must be included in taxable income.
Rationale: Betty recognizes income ratably over the first 96 payments she receives based on the exclusion ratio. If Betty dies after collecting only 60 payments (before she has recovered all of her investment), a loss can be claimed on her final return, but the loss is the difference between her original cost and the capital she recovered prior to her death, not the full amount of the payments she has received.
