Understanding Income Recognition and Exclusions in Taxation - Prof. Ramon P. Rodriquez, Exams of Business Taxation and Tax Management

Download Understanding Income Recognition and Exclusions in Taxation - Prof. Ramon P. Rodriquez and more Exams Business Taxation and Tax Management in PDF only on Docsity! ACCT 341 – Fall 2010 EXAM I Solution 1 | P a g e TRUE/FALSE (A for True and B for False) 1. Fred painted his house which saved him $2,000. According to the realization requirement, the taxpayer must recognize $2,000 of income. ANS: F Fred did not realize income because he did not engage in a transaction with another party. PTS: 1 DIF: 1 REF: p. 4-3 to 4-5 OBJ: 1 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 2 min 2. Most exclusions from gross income are not reported on Form 1040. ANS: T Gifts and inheritances are two major exclusions not reported on Form 1040. PTS: 1 DIF: 1 REF: p. 3-9 OBJ: 1 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 2 min 3. Worker’s compensation benefits are excluded from gross income. ANS: T Worker’s compensation is excluded from a recipient’s gross income. PTS: 1 DIF: 1 REF: p. 5-13 OBJ: 2 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 2 min 4. The formula for the Federal income tax on corporations is the same as that applicable to individuals. ANS: F For example, an AGI determination is required only for individual taxpayers. PTS: 1 DIF: 1 REF: p. 1-14 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 2 min 5. A taxpayer can obtain a jury trial in a U.S. Court of Federal Claims. ANS: F A jury trial is available only in a U.S. District Court. PTS: 1 DIF: 1 REF: Concept Summary 2.1 OBJ: 1 NAT: AICPA FN-Research | AACSB Analytic MSC: 2 min 6. The principal objective of the FUTA tax is to provide some measure of retirement security. ANS: F This is the objective of the FICA tax. ACCT 341 – Fall 2010 EXAM I Solution 2 | P a g e PTS: 1 DIF: 1 REF: p. 1-16 | p. 1-17 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 2 min 7. In his will, John named his nephew Steve as executor of the estate. Steve is to receive a fee of $12,000 for serving as executor. When John died, Steve performed the executorial services and received the fee. Steve can exclude the $12,000 from gross income as an inheritance from his uncle’s estate. ANS: F The $12,000 fee was a payment for services rendered rather than a bequest. PTS: 1 DIF: 1 REF: p. 5-6 OBJ: 2 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 8. As used in the income tax formula, gross income would not include the receipt of a loan the taxpayer obtained from a bank. ANS: T Borrowing money does not result in gross income. PTS: 1 DIF: 1 REF: Example 1 OBJ: 1 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 2 min 9. In December 2010, Mary collected the December 2010 and January 2011 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2010 for the 2011 rent should be included in her 2011 gross income. ANS: F The cash basis taxpayer must report the rent income in gross income for the year it is received, 2010, rather than the year in which it is earned. PTS: 1 DIF: 1 REF: p. 4-14 OBJ: 2 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 2 min 10. Federal tax legislation generally originates in the Senate Finance Committee. ANS: F Federal tax legislation normally originates in the House Ways and Means Committee. PTS: 1 DIF: 1 REF: p. 2-3 OBJ: 1 NAT: AICPA FN-Research | AACSB Reflective Thinking MSC: 2 min MULTIPLE CHOICE 11. 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. The decrease in value of assets held for the entire year should reduce income for the year. d. All of the above. ACCT 341 – Fall 2010 EXAM I Solution 5 | P a g e e. None of the above. ANS: B Answers a. and c. are incorrect because to qualify for exclusion treatment, the employee must either use the funds for the designated purpose or forfeit any unused portion of the salary reduction. Answer d. is incorrect because Heather’s gross income is reduced by the full $1,200 salary reduction. PTS: 1 DIF: 1 REF: p. 5-21 OBJ: 2 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 18. The annual increase in the 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 gaining access to the policy’s value. e. None of the above. ANS: D The income has not been actually received and, because of the restrictions, is not constructively received. PTS: 1 DIF: 1 REF: p. 4-10 OBJ: 2 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 5 min 19. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor’s diagnosis, Ben cashed in his life insurance policy to pay some medical bills. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company. a. Neither Ben nor Henry is required to recognize gross income. b. Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross income. c. Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross income. d. Ben must recognize $38,000 ($50,000 – $12,000) of gross income, but Henry does not recognize any gross income. e. None of the above. ANS: C The redemption of the policy by Ben qualifies as an accelerated death benefit paid to a terminally ill policy holder. Thus, the realized gain of $38,000 is excluded from his gross income. PTS: 1 DIF: 1 REF: p. 5-8 | Chapter 4 OBJ: 2 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 20. During 2010, Marvin had the following transactions: Salary $50,000 Bank loan (proceeds used to buy personal auto) 10,000 Alimony paid 6,000 ACCT 341 – Fall 2010 EXAM I Solution 6 | P a g e Child support paid 12,000 Gift from aunt 20,000 Marvin’s AGI is: a. $32,000. b. $38,000. c. $44,000. d. $56,000. e. $64,000. ANS: C $50,000 (salary) – $6,000 (alimony) = $44,000. The gift is an exclusion while the child support is nondeductible. Amounts borrowed are not income. PTS: 1 DIF: 2 REF: Example 1 | Exhibit 3.1 OBJ: 1 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 10 min 21. On January 5, 2010, Jane purchased a bond paying interest at 6% for $30,000. On September 30, 2010, she gave the bond to Tim. The bond pays $1,800 interest on December 31. Jane and Tim are cash basis taxpayers. When Tim collects the interest in December 2010: a. Jane must include all of the interest in her gross income. b. Tim must include all of the interest in his gross income. c. Jane reports $450 of interest income in 2010, and Tim reports $1,350 of interest income in 2010. d. Jane reports $1,350 of interest income in 2010, and Tim reports $450 of interest income in 2010. e. None of the above is correct. ANS: D Jane held the bond for 9 months before she gave it to Tim, who held the bond for the other 3 months that the interest accrued. Therefore, Jane must recognize $1,350 (9/12 × $1,800), and Tim must recognize $450 (3/12 × $1,800). PTS: 1 DIF: 1 REF: p. 4-16 | Example 21 OBJ: 3 NAT: AICPA FN-Reporting | AICPA FN-Measurement | AACSB Analytic MSC: 5 min 22. During 2010, Justin had the following transactions: Salary $ 80,000 Interest income on IBM bonds 2,000 Damages for personal injury (car accident) 200,000 Punitive damages (same car accident) 100,000 Cash dividends from Chevron Corporation stock 5,000 Justin’s AGI is: a. $185,000. b. $187,000. c. $285,000. d. $287,000. ACCT 341 – Fall 2010 EXAM I Solution 7 | P a g e e. $385,000. ANS: B $80,000 (salary) + $100,000 (punitive damages) + $5,000 (cash dividends) + $2,000 (interest) = $187,000. The damages from personal injury and the municipal bond interest are nontaxable exclusions. PTS: 1 DIF: 2 REF: Example 2 | Exhibit 3.1 | Exhibit 3.2 OBJ: 1 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 10 min 23. A use tax is imposed by: a. The Federal government and all states. b. The Federal government and a majority of the states. c. Most of the states and not the Federal government. d. All states and not the Federal government. e. None of the above. ANS: C A use tax is a complement to a general sales tax. Consequently, it is imposed by most states because only a few states do not have a general sales tax. At this point, the Federal government has no general sales tax. PTS: 1 DIF: 1 REF: p. 1-10 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 24. The proposed flat tax: a. Would simplify the income tax. b. Would eliminate the income tax. c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. d. Is a tax on consumption. e. None of the above. ANS: A There is only a single rate. The tax base is simplified by taxing only limited types of income. Many deductions and credits would be eliminated. PTS: 1 DIF: 1 REF: p. 1-18 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Reflective Thinking MSC: 5 min 25. Which, if any, of the statements regarding the standard deduction is correct? a. The basic standard deduction is indexed for inflation but the additional standard deduction is not. b. Not available to taxpayers who choose to deduct their personal and dependency exemptions. c. Not available to taxpayers who choose to claim their deduction for AGI. d. Some taxpayers may qualify for two additional standard deductions. e. None of the above. ANS: D