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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

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Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2011 was $90,000.She withdrew $40,000 from the partnership in 2011.In January 2012,after her share of the profits for 2011 had been computed,she withdrew her remaining $50,000 share of 2011 profits.As a result,Rhonda must recognize $40,000 of gross income in 2011 and $50,000 in 2012.

A) True
B) False

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Question 22

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Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.The $75,000 payment reduces Ted's AGI and increases Alice's AGI.

A) True
B) False

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Question 23

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An accrual basis taxpayer can defer all advance payments for services until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes.

Green,Inc.,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc.and received $250,000 of coverage for the year at a cost to Green of $3,000.The Uniform Premiums (based on Sam's age) are $.30 per month for $1,000 of protection.How much must Sam include in gross income this year?

Jerry purchased a U.S.Series EE savings bond for $279.The bond has a maturity value in 10 years of $500 and yields 6% interest.This is the first Series EE bond that Jerry has ever owned.

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.If Son's investment income for the year is less than $1,000,Father is not required to impute interest income.

The effects of a below-market loan for $450,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Wayne owns a 25% interest in the capital and profits of Emerald Company (a calendar year partnership) .For tax year 2011,the partnership earned revenue of $600,000 and had operating expenses of $300,000.During the year,Wayne withdrew from the partnership a total of $64,000.He also invested an additional $20,000 in the partnership.For 2011,Wayne's gross income from the partnership is:

The annual increase in the cash surrender value of a life insurance policy:

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.

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

Maroon Corporation is considering deferred compensation plans for its executive employees over age 55.All of the employees use the cash method of accounting.One plan is to allow the employee to make an election at the beginning of the year to defer 10% of his or her salary until retirement,at which time the executive would receive the deferred pay plus 6% interest.

Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

Tim and Janet were divorced.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement,Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years,or until Tim's death,whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

Norma's income for 2011 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2011,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2012.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2012.

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 1,2011,Kathy sold a one-year membership and a two-year membership.

As a general rule:

When stock is sold after the dividend is declared but prior to the record date,the buyer must recognize as income the dividend received,rather than a recovery of the amount of the dividend that is included in the price of the stock.

For purposes of determining gross income,which of the following is true?