Tax Acc Ch 4 Quizes

Because financial accounting and tax accounting both employ the realization principle, taxable income will always equal accounting income as computed under generally accepted accounting principles.

Choose one answer.

a. True

b. False

Both the financial accounting system and the tax accounting system employ the realization principle, but there are other differences between the two systems which have different objectives. p. 4-5Correct

Marks: 1/1

An accrual basis taxpayer who owns and operates a professional basketball team cannot allocate income from season ticket sales on the basis of the number of games played during the year.

Choose one answer.

a. True

b. False Correct.

The Seventh Circuit Court of Appeals has permitted the taxpayer to defer income recognition until the games were played because definite dates could be established as to the time the income would be earned. p. 4-13Correct

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Choose one answer.

a. The OID will not be included in income until the end of the third year.

b. The OID will be amortized by the double-declining method.

c. All of the OID must be recognized as gross income in the first year.

d. The interest income for the first year will be less than the interest income for the third year.

Correct.

e. None of the above.

The OID is amortized using the effective interest rate method. p. 4-11 and Example 14

CorrectMarks for this submission: 1/1.

Able Corporation sued Baker Corporation for intentional damage to Able's goodwill. Able had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Able's balance sheet. The suit was settled and Able received $2,000,000, the estimated profits lost because of Baker's damage infliction.

Choose one answer.

a. The $2,000,000 is not taxable because it replaces the goodwill destroyed.

b. The $2,000,000 is not taxable because Able did nothing to earn the money.

c. The $2,000,000 is not taxable because it represents a recovery of capital.

d. The $2,000,000 is not taxable because Able settled the case.

e. None of the above. Correct.

Able Corporation must include the $2,000,000 in gross income. pp. 4-8 and 4-9


Marks: 0/1

Dorothy purchased a certificate of deposit for $10,000 on January 1, 2011. The certificate's maturity value in three years (December 31, 2013) is $11,087, yielding 3.5% before-tax interest.

Choose one answer.

a. Dorothy must recognize $1,087 gross income in 2013.

b. Dorothy must recognize $362 ($1,087/3) interest income each year.

c. Dorothy must recognize $1,087 gross income in 2011.

d. Dorothy must recognize $350 gross income in 2011.

Correct.


The 3.5% interest rate is applied to the original investment in the first year. Answers a., b., and c. are incorrect because these answers assume a method of allocating the income that differs from the effective interest method. p. 4-11

Correct

Marks: 0/1

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as if one-half is earned by each spouse.

Choose one answer.

a. True

b. False Correct.

This result occurs only in certain community property states. pp. 4-17 and 4-20CorrectMarks for this submission: 1/1. With previous penalties this gives 0/1

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $50,000 and its fair market value on the date of the transfer is $75,000. Fred later sells the stock for $78,000. Fred's recognized gain from the sale of the stock is $3,000.

Choose one answer.

a. True

b. False Correct.

Fred's basis is $50,000, the same as Paula's basis. So Fred's recognized gain is $28,000 ($78,000 - $50,000). p. 4-19 and Example 31


An advantage to operating a business as a partnership is that the partner has no gross income from the partnership unless the partner makes a withdrawal during the year.

Choose one answer.

a. True

b. False Correct.

The partnership profits flows through to the partners regardless of whether they are distributed to the partners. Therefore, each partner must include his or her share of the partnership profits in gross income. p. 4-16


Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2011. Copper Company is a publicly held company that has declared a $1.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $1.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $1,000 dividend on October 18, 2011.

Choose one answer.

a. Darryl must recognize the $1,000 dividend as his income because he knew the dividend would be paid.

b. Darryl must recognize $750 of the dividend because he owned the stock for three-fourths of the year.

c. Darryl must recognize the income of $1,000 because he constructively received the $1,000.

d. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $1,000.

Correct.

e. None of the other answers are correct.

The gift of the stock is made prior to the declaration date. p. 4-15


Ward has a 25% interest in the PW partnership. In the current year, the partnership had $800,000 in revenues and $440,000 in operating expenses. The partnership was in need of working capital. Therefore, each partner withdrew only 75% of his or her share of the income. Thus, Ward received $67,500 [.25($800,000 - $440,000)(.75)].

Choose one answer.

a. Ward's gross income from the partnership is $200,000 (.25 $800,000).

b. Ward's gross income from the partnership is $67,500.

c. Ward's gross income from the partnership is $90,000.

Correct.

d. Ward's gross income from the partnership is $90,000, but he will be allowed a deduction for $22,500.


Ward's share of the income from the partnership is $90,000 [.25($800,000 - $440,000)]. p. 4-16 and Example 25

Marks: 1/1

Debra and Don were married in Virginia, a common law state, but moved to Texas, a community property state. The calculation of their taxable income on a joint return will not change as a result of changing their state of residence from a common law state to a community property state.

Choose one answer.

a. True Correct.

b. False

The husband’s and wife’s income is combined on a joint return. Therefore, it is not necessary to address questions of who is the true earner of the income. pp. 4-17 to 4-19CorrectMarks for this submission: 1/1.

Marks: 1/1

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as if one-half is earned by each spouse.

Choose one answer.

a. True

b. False Correct.

This result occurs only in certain community property states. pp. 4-17 and 4-20CorrectMarks for this submission: 1/1.

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $50,000 and its fair market value on the date of the transfer is $75,000. Fred later sells the stock for $78,000. Fred's recognized gain from the sale of the stock is $3,000.

Choose one answer.

a. True

b. False Correct.

Fred's basis is $50,000, the same as Paula's basis. So Fred's recognized gain is $28,000 ($78,000 - $50,000). p. 4-19 and Example 31

Correct

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2011. Copper Company is a publicly held company that has declared a $1.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $1.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $1,000 dividend on October 18, 2011.

Choose one answer.

a. Darryl must recognize the $1,000 dividend as his income because he knew the dividend would be paid.

b. Darryl must recognize $750 of the

dividend because he owned the stock for three-fourths of the year.

c. Darryl must recognize the income of $1,000 because he constructively received the $1,000.

d. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $1,000.

Correct.


The gift of the stock is made prior to the declaration date. p. 4-15

CorrectMarks for this submi

Marks: 1/1

On June 30, 2011, Billy, a cash basis taxpayer, gave Dan the gift of a bond, $10,000 face amount, that pays $1,000 interest each December 31. When Dan collected the interest on December 31, 2011:

Choose one answer.

a. Billy must include all of the interest in his gross income.

b. Dan must include all of the interest in his gross income.

c. Billy must report $500 interest income and Dan must report $500 interest income.

Correct.

d. Billy must recognize $500 of income at the time of the gift.

e. Dan must recognize $10,000 of income at the time of the gift.

p. 4-16 and Example 21


In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Choose one answer.

a. True Correct.

b. False

The imputed interest rules apply to gift loans. However, if the amount of the loan is for $100,000 or less, the imputed interest cannot exceed the borrower's net investment income for the tax year. If net investment is $1,000 or less, it is considered to be $0. pp. 4-25 and 4-26


Lois, who is single, received $9,000 of Social Security benefits. She also received $30,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by less than $1,000.

Choose one answer.

a. True

b. False Correct.

The $1,000 loss will reduce her MAGI and thus reduce her taxable Social Security benefits. p. 4-33CorrectMarks for this submission: 1/1.

Father made an interest-free loan of $15,000 to Son who used the money to buy a certificate of deposit. If Son's investment income for the year is less than $1,000, Father is not required to impute interest income.

Choose one answer.

a. True Correct.

b. False

Assuming the principal purpose of the loan is not tax avoidance, no interest is imputed because the loan amount is $100,000 or less and the son's investment income is less than $1,000. p. 4-25


Hank and Marilyn were co-owners of a personal residence. As part of their divorce agreement, Marilyn received sole ownership of their personal residence. This property transfer is classified as alimony if both spouses make the proper election.

Choose one answer.

a. True

b. False Correct.

Each partner in a partnership must report his/her distributive share of the partnership's income and deductions for the partnership's tax year ending within or with his/her tax year even if such income is not actually distributed. p. 4-16


Marks: 1/1

Red, Inc. provides group term life insurance to the officers of the corporation only. Susan, a vice-president, received $200,000 of coverage for the year at a cost to Red, Inc. of $2,800. The Uniform Premiums (based on Susan's age) are $8 a year for $1,000 protection. How much of this must Susan include in gross income this year?

Choose one answer.

a. $0.

b. $1,200.

c. $1,600.

d. $2,800. Correct.


The plan is discriminatory. Therefore, the employee's income is the greater of the amount from the IRS table ($8 X 200 = $1,600) or the employer's cost ($2,800). p. 4-33

CorrectMarks for this subm\

The effect of alimony recapture is to:

Choose one answer.

a. Make delinquent payments nondeductible.

b. Require the payor to increase his or her taxable income and to allow the payee to reduce his or her taxable income.

Correct.

c. Require the payor and the payee to amend prior returns when alimony substantially increases.

d. Convert capital gain into ordinary income.


pp. 4-20 to 4-22 and Example 32


The alimony recapture rules are intended to:

Choose one answer.

a. Assist former spouses in collecting alimony when the other spouse moves to another state.

b. Prevent tax deductions for property divisions.

Correct.

c. Protect former spouses from having a large tax liability after the payments have already been spent.

d. Distinguish child support payments from alimony.


pp. 4-21 to 4-23

Correct

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car. There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The loan was outstanding for the entire year.

Choose one answer.

a. If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.

Correct.

b. Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment income.

c. Debra must recognize $6,090 of imputed interest income.

d. Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.


Assuming the principal purpose of the loan is not tax avoidance, no interest is imputed because the loan amount is $100,000 or less and the son's investment income is less than $1,000. p. 4-25


Betty purchased an annuity for $21,000 in 2011. Under the contract, Betty will receive $250 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.

Choose one answer.

a. If Betty collects $3,000 in 2012, the $3,000 is treated as a recovery of capital and thus is not taxable.

b. If Betty dies after collecting a total of 60 payments, she has an economic loss that is not deductible.

c. If Betty lives to collect more than 96 payments, she must amend her prior years' returns to increase her taxable portion of each payment received in the past.

d. If Betty lives to collect more than 96 payments, all amounts received after the 96th payment must be included in her gross income.

Correct.


The options other than d. are simply contrary to the scheme provided in the Code for the taxation of annuities. If Betty lives after collecting only 60 payments, before she has recovered all of her capital, a loss can be claimed on her final return. Therefore, b. is incorrect. pp. 4-27 and 4-30

Correct

Tax Acc Ch 4 Quizes

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