CHAPTER 5--GROSS INCOME EXC
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CHAPTER 5--GROSS INCOME EXC

Course Number: ACCT 216, Spring 2012

College/University: Hofstra

Word Count: 21353

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CHAPTER 5--GROSS INCOME: EXCLUSIONS 4 copy 1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax. True False 2. John told his nephew, Steve, if you maintain my house when I cannot, I will leave the house to you when I die. Steve maintained the house and when John died Steve inherited the house. The value of the residence must...

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5--GROSS CHAPTER INCOME: EXCLUSIONS 4 copy 1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax. True False 2. John told his nephew, Steve, if you maintain my house when I cannot, I will leave the house to you when I die. Steve maintained the house and when John died Steve inherited the house. The value of the residence must be included in Steves gross income. True False 3. Brooke works part-time as a waitress in a restaurant. For groups of 7 or more customers, the customer is charged 15% of the bill for Brookes services. For parties of less than 7, the tips are voluntary. Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers. Using the customary 15% rate, her voluntary tips would have been only $6,000. Brooke must include $18,000 ($11,000 + $7,000) in gross income. True False 4. Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wifes employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mels Federal gross income from the above is $2,500. True False 5. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income. True False 6. Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Eds gross income. Eds wife is required to recognize as gross income the $46,000 she received. True False 7. Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wifes medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 $12,000) in gross income. True False 8. When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000 and Insurance Purchase, Inc., became the beneficiary. She had paid total premiums of $19,000. Betty died 8 months after the sale. Insurance Purchase, Inc., collected $50,000 on the policy. The company had paid additional premiums of $4,000 on the policy. Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc., is required to recognize a $14,000 gain from the insurance policy. True False 9. Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school. True False 10. If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income. True False 11. Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income. True False 12. In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013. Emily can exclude the $2,500 from her gross income in 2012. True False 13. Because graduate teaching assistantships are awarded on the basis of academic achievement, the payments are generally scholarships and therefore are excluded from gross income. True False 14. In 2012, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramons negligence. In 2013, Theresa collected from his insurance company. She received $15,000 for loss of income, $25,000 punitive damages, and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above, Theresas 2013 gross income is increased by $33,000. True False 15. Workers compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury. True False 16. Sam was unemployed for the first two months of 2011. During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers compensation benefits. Sams Federal gross income from the above is $18,000 ($4,000 + $14,000). True False 17. Sarahs employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income. True False 18. Megs employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Megs coverage were $1,200. Meg was absent from work for two months as a result of a kidney infection. Megs employers insurance company paid Megs regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg is not taxed on any of the above amounts. True False 19. Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody isnot required to recognize any gross income from the HSA for the year. True False 20. If an employer pays for the employees long-term care insurance premiums, the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income. True False 21. Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole. True False 22. Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income. True False 23. Roger is in the 35% marginal tax bracket. Rogers employer has created a flexible spending account for medical and dental expenses that are not covered by the companys health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Under the plan, he must forfeit the $100 unused amount. His after-tax cost of overfunding the plan is $65. True False 24. Mauve Company permits employees to occasionally use the copying machine for personal purposes. The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine. However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier. The use of the copy machine may be excluded from gross income as a de minimis fringe benefit. True False 25. Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost. True False 26. Nicoles employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work. The employer also pays the cost of the rail pass, $75 per month. Nicole can exclude both of these payments from her gross income. True False 27. A U.S. citizen who works in France from February 1, 2011 until January 31, 2012 is not eligible for the foreign earned income exclusion in 2011 but is eligible for it in 2012. True False 28. Generally, a U.S. citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income. True False 29. Calvins property was taken by the State of Louisiana to build a highway overpass. He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award. Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award. True False 30. A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2012. His total itemized deductions in 2012 were $18,000. In 2013, he received a $900 refund of his 2012 state income tax. The taxpayer must include the $900 refund in his 2013 Federal gross income in accordance with the tax benefit rule. True False 31. The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2012 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2013. The taxpayer must add $5,000 to his 2013 gross income in accordance with the tax benefit rule to correct for the 2012 error. True False 32. Mother participated in a qualified state tuition program for the benefit of her son. She contributed $15,000. When the son entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for her son, Mother must include $5,000 ($20,000 $15,000) in her gross income. True False 33. The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account. True False 34. Benny loaned $100,000 to his controlled corporation. When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt. The corporation should treat the cancellation as a nontaxable contribution to capital. True False 35. A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income. True False 36. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted. True 37. False The taxpayers marginal tax bracket is 25%. Which would the taxpayer prefer? A. $1.00 taxable income rather than $1.00 tax-exempt inco B. $.80 tax-exempt income rather than $1.00 taxable incom C. $1.25 taxable income rather than $1.00 tax-exempt inco D. $1.30 taxable income rather than $1.00 tax-exempt inco E. None of the above. 38. Cash received by an individual: A. Is not included in gross income if it was not earned. B. Is not taxable unless the payor is legally obligated to ma C. Must always be included in gross income. D. May be included in gross income although the payor payment. E. None of the above. 39. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she made it all possible. The necklace was worth $10,000, but she already owned more jewelry than she desired. A. The neck Sharon b required B. The value of the necklace is not included in Sharons gr C. The value of the necklace is not included in Sharons gr information was an illegal act and the SEC can confisca D. The value of the necklace must be included in Sharons received by her. E. None of the above. 40. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income: A. $0 . B. $2,500. C. $10,000. D. $25,000. E. None of the above. 41. Iris collected $100,000 on her deceased husbands life insurance policy. The policy was purchased by the husbands employer under a group policy. Iriss husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $12,500 each. A. None of the payments mu included in Iriss gross inc B. The first 8 payments are a return of her capital and thus income from the policy until she receives the ninth paym C. For each $12,500 payment that Iris receives, she can e $12,500) from gross income. D. For each $12,500 that Iris receives, she can exclude fro ($5,000/$125,000 $12,500). E. None of the above. 42. Turquoise Company purchased a life insurance policy on the companys chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joes widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy. A. Rebecca proceeds must incl $400,000 B. Turquoise Company and Rebecca can exclude the life i $100,000, respectively, from gross income. C. Turquoise Company can exclude $1,100,000 ($1,500,0 Rebecca must include $84,000 in gross income. D. Turquoise Company must include $1,100,000 ($1,500,0 Rebecca must include $100,000 in gross income. E. None of the above. 43. Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customers loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan: A. Must recognize $1,500 in from the life insurance pr B. Must recognize $1,300 income from the life insurance p C. Does not recognize income because life insurance proc D. Does not recognize income from the life insurance beca capital. E. None of the above. 44. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctors diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. 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 gros income. B. Both Ben and Henry must recognize $38,000 ($50,000 income. C. Henry must recognize $38,000 ($50,000 $12,000) of recognize any gross income. D. Ben must recognize $38,000 ($50,000 $12,000) of gr recognize any gross income. E. None of the above. 45. Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $10,000 of premiums on the policy. The insurance company has offered to pay him $75,000 to cancel the policy, although its cash surrender value was only $60,000. Albert accepted the $75,000. Albert used $5,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy: A. Albert is gross income b illness. B. Albert must recognize $65,000 ($75,000 $10,000) of g income. C. Albert must recognize $10,000 ($75,000 $60,000 $5 income. D. Albert must recognize $75,000 of gross income, but he expenses. E. None of the above. 46. A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: A. Only tuition. B. Tuition, books, and supplies. C. Tuition, books, supplies, meals, and lodging. D. Meals and lodging. E. None of the above. 47. Ron, age 19, is a full-time graduate student at City University. During 2012, he received the following payments: State scholarship for ten months (tuition and books) Loan from college financial aid office Cash support from parents Cash award for being the outstanding resident adviser Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Rons adjusted gross income for 2012? A. $1,500. B. $4,000. C. $7,500. D. $15,500. E. None of the above. 48. Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barneys gross income from the above is: A. $0 . B. $6,300. C. $11,300. D. $12,800. E. None of the above. 49. Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jenas gross income for the year is: A. $10,0 00. B. $4,000. C. $3,000. D. $500. E. None of the above. 50. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company directly to each childs educational institution and are payable only if the student maintains a B average. A. The tuition excluded scholarsh B. The tuition payments of $10,000 each must be included C. The tuition payments of $30,000 may be excluded from payments are for the academic achievements of the ch D. The tuition payments of $30,000 must be included in Ol E. None of the above. 51. The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. A. The $13,500 is exc is used to pay for tu B. The $13,500 is taxable compensation. C. The $13,500 is considered a scholarship and, therefore D. The $13,500 is excluded because the total amount rece standard deduction and personal exemption. E. None of the above. 52. In 2012, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashads negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashads employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages. Ambers insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalids original claim and Ambers offer? A. Ambers punitive d suffering. B. Ambers offer is $10,500 less. [($30,000 .35) = $10,50 C. Ambers offer is $19,500 less. [$30,000(1 .35) = $19,500]. D. Ambers offer is $5,000 more. [$70,000 (1 .35)($100 $65,000]. E. None of the above. 53. Christie sued her former employer for a back injury she suffered on the job in 2011. As a result of the injury, she was partially disabled. In 2012, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employers flagrant disregard for the employees safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2011 return, reducing her taxable income by $12,000. Christies 2012 gross income from the above is: A. $415, 000. B. $412,000. C. $255,000. D. $175,000. E. $172,000. 54. Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased Damage settlement to replace his lost salary What is the amount that Marion must include in gross income for the current year? A. $25,000. B. $15,000. C. $12,500. D. $10,000. E. $0. 55. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income: A. $700, 000. B. $500,000. C. $490,000 [($700,000/$1,000,000) $700,000]. D. $0. E. None of the above. 56. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: A. $0 . B. $100,000. C. $120,000. D. $270,000. E. None of the above. 57. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: A. $10,0 00. B. $50,000. C. $60,000. D. $85,000. E. None of the above. 58. The exclusion for health insurance premiums paid by the employer applies to: A. Only current employees and their spouses. B. Only current employees and their spouses and depende C. Only current employees and their disabled spouses. D. Present employees, retired former employees, and thei E. None of the above. 59. Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $4,000 from her employer. For the next 60 days, she received $6,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $2,000 on an income replacement policy she had purchased. Of the $12,000 she received, Julie must include in gross income: A. $0 . B. $4,000. C. $8,000. D. $10,000. E. $12,000. 60. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employees health savings account (HSA). Matildas employer made the contributions in 2011 and 2012, and the account earned $100 interest in 2012. At the end of 2012, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2012 gross income: A. $0 . B. $100. C. $1,600. D. $3,100. E. None of the above. 61. All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employees hospitalization insurance premiums. If the change is made, the employees after-tax and insurance pay will: A. Increase by the same amount for all employees. B. Increase more for the highly paid employees (35% marg C. Increase more for the low income (10% and 15% margi D. Decrease by the same amount for all employees. E. None of the above. 62. The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance. A. If an emp and the e bracket, t offer. B. If an employees wages are reduced by $4,000 and the bracket, the employee would benefit from the offer. C. If an employees wages are reduced by $6,000 and the bracket, the employee would benefit from the offer. D. a., b., and c. E. None of the above. 63. James, a cash basis taxpayer, received the following compensation and fringe benefits in 2012: Salary Disability income protection premiums Long-term care insurance premiums His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on Jamess credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Jamess gross income from the above? A. $66,000. B. $72,000. C. $73,000. D. $75,000. E. None of the above. 64. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casinos employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct? A. All the employ the value of th B. Only the restaurant employees may exclude the value o C. Only the employees who work in gambling, the bar, and from gross income. D. All of the employees may exclude the value of the meal E. None of the above. 65. Section 119 excludes the value of meals from the employees gross income: A. Whenever the employee working during the norm mealtimes. B. When the employer pays for the meals, if the employee C. When the meals are provided for the employee, on the a convenience to the employer. D. When the meals are provided for the employee on the e convenience to the employee. E. None of the above. 66. Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income. A. $0 . B. $800 per month. C. $2,100 per month. D. $1,890 ($2,100 .90). E. None of the above. 67. Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. A. Adam must include the reimbursement in his gross income. B. Adam can exclude the reimbursement from his gross in the convenience of the employer. C. Adam can exclude the reimbursement from his gross in the employers business premises (the truck). D. Adam may exclude from his gross income the differenc and what it would have cost him to eat at home. E. None of the above. 68. Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the meals. What is Tommys gross income from working as a resident advisor? A. $1,800, the entire value of the contract is compensation B. $1,000, only the lodging contract must be included in gr C. $800, only the meal contract must be included in gross D. $0, the entire value of the contract is excluded from gro E. None of the above. 69. Under the Swan Companys cafeteria plan, all fulltime employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. I. II. III. IV. Group medical and hospitalization insurance for the employee Group medical and hospitalization insurance for the employee Child-care payments, actual cost but not more than $4,800 a y Cash required to bring the total of benefits and cash to $8,000 Which of the following statements is true? A. Sam, a full-time employee, selects choices II and III and include the $2,000. B. Paul, a full-time employee, elects to receive $8,000 cas these same insurance benefits for him. Paul is not requ income. C. Sue, a full-time employee, elects to receive choices I, II include $3,200 in gross income. D. All of the above. E. None of the above. 70. Heather is a full-time employee of the Drake Company and participates in the companys flexible spending plan that is available to all employees. Which of the following is correct? A. Heather r spent $1, reimburse expenses reduced b B. Heather reduced her salary by $1,200, and received on actual medical expenses. She is not refunded the $300 income is reduced by $1,200. C. Heather reduced her salary by $1,200, and received on medical expenses. She is not refunded the $400. Her g D. Heather reduced her salary by $1,200, and received on medical expenses. She forfeits the $300. Her gross inco E. None of the above. 71. Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round. A. Tom must include $800 in gross income. B. Tom is not required to include anything in gross income benefit. C. Tom is not required to include the $800 in gross income gift. D. Tom is not required to include anything in gross income service fringe benefit. E. None of the above. 72. The Royal Motor Company manufactures automobiles. Employees of the company can buy a new automobile for Royals cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealers cost. Officers of Local Dealer are allowed to use a company vehicle (for personal use) at no cost. A. None of t the fringe to recogn B. Employees of Royal are required to recognize as gross the automobile purchased. C. Employees of Local Dealer are required to recognize as Dealer loses as a result of the sale to the employees. D. Local Dealer officers must recognize gross income from vehicles. E. None of the above. 73. Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tans cost was $9,000. The company also paid for Peggys parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees parking fees. Peggys gross income from the above is: A. $0 . B. $600. C. $3,500. D. $4,100. E. None of the above. 74. The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organizations agenda for its meetings. The copies made during the year would have cost $150 at a local office supply. A. Ed must include $150 in his gross income. B. Ed may exclude the cost of the copies as a no-additiona C. Ed may exclude the cost of the copies only if the organi D. Ed may exclude the cost of the copies as a de minimis E. None of the above. 75. The Perfection Tax Service gives employees $12.50 as supper money when they are required to work overtime, approximately 25 days each year. The supper money received: A. Must be included in the employees gross income. B. Must be included in the employees gross income if the C. May be excluded from the employees gross income as D. May be excluded from the employees gross income as E. None of the above. 76. The president of Silver Corporation is assigned a secretary. When the secretary has completed work on company matters, the secretary is available to do the presidents personal matters (pick up laundry, buy groceries) so long as the privilege is not abused. No other employee has a personal secretary. A. The value the presid cost serv B. The value of the secretarys services provided to the pre president did not receive cash. C. The value of the secretarys services provided to the pr additional-cost services because the services are D. If the value of secretarys services are considered benefit from gross income even through other employee E. None of the above. 77. Evaluate the following statements: I. II. III. De minimis fringe benefits are those that are so immaterial that acc De minimis fringe benefits are subject to strict anti-discrimination re Generally, a fringe benefit of less than $50 is considered de minimi A. Only I is true. B. Only III is true. C. Only I and III are true. D. I, II, and III are true. E. None of the above. 78. Kristens employer owns its building and provides parking space for its employees. The value of the free parking is $150 per month. Karens employer does not have parking facilities, but reimburses its employee for the cost of parking in a nearby garage, up to $150 per month. A. Kristen and Karen m gross income from services. B. Kristen can exclude the employer provided parking from her reimbursement in gross income. C. Kristen must include the value of the employer provided Karen can exclude her reimbursement from gross incom D. Neither Kristen nor Karen is required to include the cos E. None of the above. 79. A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500. A. Both employees must i benefits received in gro B. The officer must include $500 in gross income. C. The officer must include $1,500 in gross income. D. The hourly employee must include $1,000 in gross inco E. None of the above. 80. A U.S. citizen worked in a foreign country for the period July 1, 2011 through August 1, 2012. Her salary was $10,000 per month. Also, in 2011 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2012. Which of the following is correct? A. The taxpa gross inc earned in than the a exclusion included B. The taxpayer can exclude a portion of the compensatio 2011 and 2012, but must include the dividend income o C. The taxpayer can exclude from U.S. gross income $60, taxpayer will exceed the twelve month limitation and, th must be included in gross income. All of the dividends m D. The taxpayer can exclude a portion of the salary from U and all of the dividend income. E. None of the above. 81. Louise works in a foreign branch of her employers business. She earned $5,000 per month throughout the relevant period. A. If Louise 1, 2011 u $40,000 f $50,000 i B. If Louise worked in the foreign branch from May 1, 2011 exclude anything from gross income because she was n in either year. C. If Louise began work in the foreign country on May 1, 2 30, 2012 in order to exclude $55,000 from gross income D. Louise will not be allowed to exclude any foreign earned $95,100. E. None of the above. 82. In the case of interest income from state and Federal bonds: A. Interest o received that state B. Interest on United States government bonds is subject t C. Interest on bonds issued by State A received by a resid tax in State B. D. All of the above are correct. E. None of the above are correct. 83. Heathers interest and gains on investments for 2012 were as follows: Interest on Bland County school bonds Interest on U.S. government bonds Interest on a Federal income tax refund Gain on the sale of Bland County school bonds Heathers gross income from the above is: A. $2,000. B. $1,800. C. $1,400. D. $1,300. E. None of the above. 84. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk. A. If she buy interest, h greater th school bo B. If she buys a U.S. government bond paying 6%, her afte she purchased the York County school bond. C. If she buys a common stock paying 6% dividend, her af if she purchased the York County school bond. D. All of the above are correct. E. None of the above are correct. 85. Doug and Pattie received the following interest income in the current year: Savings account at Greenbacks Bank United States Treasury bonds Interest on State of Virginia bonds Interest on Federal tax refund Interest on state income tax refund Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return? A. $4,775. B. $4,675. C. $4,575. D. $4,300. E. None of the above. 86. George, an unmarried cash basis taxpayer, received the following amounts during 2012: Interest on savings accounts Interest portion of proceeds of a bank certificate of deposit purchased on July 1, 2010, and matured on June 30, 2012 (under DID rules for 2012) Dividends on USG common stock Interest on a Federal income tax refund Interest on City of Radford school bonds What amount should George report as gross income from dividends and interest for 2012? A. $4,050. B. $4,500. C. $4,800. D. $6,000. E. None of the above. 87. Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuarts gross income from the receipt of the additional Turquoise and Blue shares is: A. $0 . B. $4,800. C. $7,200. D. $12,000. E. None of the above. 88. Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds: A. Is gross inco the bond in t B. Is gross income to the student in the year the interest is C. Is included in the students gross income in the year the to pay educational expenses. D. Is not included in anyones gross income if the proceed E. None of the above. 89. The exclusion of interest on educational savings bonds: A. Applies only to savings bonds owned by the child. B. Applies to parents who purchase bonds for which the pr education. C. Means that the child must include the interest in income D. Does apply even if used to pay for room and board. E. None of the above. 90. Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition. A. Martha m $6,000) in used to p B. Martha must include the portion of the $2,000 accumula interest). C. Marthas son must include the $2,000 ($8,000 $6,000 are used to pay the tuition. D. Neither Martha nor her son must include the $2,000 in g E. None of the above. 91. In December 2012, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2013 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2012 tax return. He had $150,000 of taxable income that year. On June 30, 2013, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: A. Todd should amen and claim $500 les expense. B. Todd should include the $500 in 2013 gross income in a C. Todd should add the $500 to his sales proceeds from th D. Todd should include the $500 in 2013 gross income in a doctrine. E. None of the above. 92. Tonya is a cash basis taxpayer. In 2012, she paid state income taxes of $6,000. In early 2013, she filed her 2012 state income tax return and received a $600 refund. A. If Tonya i Federal in deduction at least $ to reduce B. If Tonya itemized her deductions in 2012 on her Federa deductions exceeded the standard deduction by at leas her 2013 gross income. C. If Tonya itemized her deductions in 2012, she must ame and use the standard deduction. D. Tonya must recognize $600 as income from discharge o E. None of the above. 93. Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal. A. Harold must recognize ($80,000 $60,000) o income. B. Harold is not required to recognize gross income, but m $130,000. C. Harold is not required to recognize gross income, since D. Jewel must recognize gross income of $20,000 ($80,00 debt. E. None of the above. 94. Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt. A. Hazel did not realize because she obtain illegally. B. Hazel is not required to include the $6,000 in gross inco to her. C. Hazel must include $6,000 in gross income from discha D. Hazel may exclude the $6,000 from gross income beca E. None of the above. 95. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Golds building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must: A. Include $40,000 in gross income. B. Reduce the basis in its assets by $40,000. C. Include $25,000 in gross income and reduce its basis in D. Include $15,000 in gross income and reduce its basis in E. None of the above. 96. On January 1, 2002, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant. On January 1, 2012, the company acquired the bonds on the open market for $11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following: A. The company must recognize a $500,000 gain. B. The company can make an election to recognize a $500 basis in the plant by $500,000. C. The company must recognize a $500,000 gain and incr by $500,000. D. The company can amortize the $500,000 gain, recogniz the bonds. E. None of the above. 97. Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2012. The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Dennys monthly mortgage payments could be reduced to a manageable amount. Denny also had a vacation home with a mortgage whose payments were beyond his means. The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000. The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction. A. Denny is as a resu mortgage B. Denny is required to recognize $5,000 income from the vacation home, but has no gross income from the reduc personal residence. C. Denny is required to recognize $10,000 income from th vacation home, but nothing for the reduction in the mort D. Denny is required to recognize $10,000 income from th vacation home and $20,000 income for the reduction in residence. E. None of the above. 98. Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt. A. If Flora h bank acc debt, and does not must redu B. If Flora had borrowed the funds from a bank, and the ba the debt, when the value of the property is $80,000, Flo C. If Flora transfers to the bank other property, with a basis $95,000, in full payment of the debt, Flora can recogniz D. If the $95,000 is owed to the person who sold the prope $85,000 in full payment for the debt, Flora does not rec the land. E. None of the above. 99. Sandy is married, files a joint return, and expects to be in the 28% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of $100,000. He paid $60,000 of premiums on the policy. His gain from cashing in the life insurance policy would be ordinary income. If he retains the policy, the insurance company will pay him $3,000 (3%) interest each year. Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds. a. What before-tax rate of return would Sandy be required to earn on the return earned with the insurance company? b. Assume Sandy estimates he can earn a 6% before-tax rate of return on can earn a 6% return for the remainder of his life and that he will reinve return. If Sandy expects to live 10 more years, which alternative will yie Sandys death? (Given: The future value of an annuity in 10 years assu value of an annuity in 10 years assuming a 2.16% return is 11.03). 100 Beverly died during the current year. At the time of her death, her accrued salary and . commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverlys salary for the year prior to her death. The employer had a policy of making the salary payments to help out the family in the time of its greatest need. Beverlys spouse collected her interest in the employers qualified profit sharing plan amounting to $30,000. As beneficiary of his wifes life insurance policy, Beverlys spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax for Beverlys spouse? 101. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm Medical expenses Loss of wages Punitive damages The defendants insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)? 102.George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the companys cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The companys normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call? 103.Sonja is a United States citizen who has worked in Spain for the past 10 months. She received $5,000 a month as compensation. Her employer has offered to extend Sonjas contract to work in Spain for another 5 months at the same rate of pay. If she rejects the offer, she can return to the United States and receive the same salary. While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay. The marginal tax rate on her income taxed in the United States is 25%. Compare Sonjas after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States. 104 Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he . discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return? 105.Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years. Her son will be in the 15% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program? 106 Gull Corporation was undergoing reorganization under the bankruptcy laws. The shareholders, . who had made loans of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on the debt. The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $250,000. A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand. Finally, the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000. Compute the corporations gross income and other adjustments necessary as a result of the above transactions. 107 Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at . age 60. She was practically penniless at the time of her death, owed a $12,000 hospital bill, and had a disabled spouse. The company was very concerned about its public image, and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means, the Board of Directors agreed to pay Carmens hospital bill and to give her spouse $6,000 per year for the rest of his life. Discuss both sides of the question whether Carmen (or her estate) and her spouse realize any taxable income from the above. 108 What are the tax problems associated with payments received by a wife from her deceased . husbands employer? (Assume the wife renders no services to the employer.) 109.Bob had a terminal illness and realized that he cant take it with him. Therefore, he cashed in his insurance policy and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda. Was Bobs behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use? 110. Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an employer-sponsored income protection insurance policy. Bens employersponsored hospitalization insurance policy also paid for 90% of his medical expenses. Ben also collected on an income protection policy that he purchased. Which of the above sources of income are taxable? Explain the basis for excluding any item or items. 111. The CEO of Cirtronics Inc., discovered that the companys competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the companys employees. 112. What Federal income tax benefits are provided for college students? 113. In 2012, Bobs unincorporated business has a net loss of $30,000. Bob has investment income of $40,000. Itemized deductions and personal exemptions total $26,000. Thus, on his 2012 tax return, his taxable income was a negative $16,000. In 2012, Bob discovered that an employee has stolen $25,000 (pocketing the proceeds from unrecorded sales) from the business. This $25,000 theft loss is included in calculating the net loss of Bobs business of $30,000. In 2013, Bob recovers the $25,000 from the former employee. How can the tax benefit rule assist Bob in 2013? 114. Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income. What are the effects of the exclusions on: a. b. 115. The progressiveness of the tax system? The complexity of the tax system? Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis. They each were able to convince the mortgage holder to reduce the principal amount on the mortgage. Sallys mortgage is on her personal residence and Eds mortgage is on rental property he owns. a. Explain whether each of these individuals has realized income from the b. Assume that under the current system of measuring income, each of th in the mortgages. Should either of these taxpayers be permitted to excl 116. If a tax-exempt bond will yield approximately .65 (1 .35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors? CHAPTER 5--GROSS INCOME: EXCLUSIONS 4 copy Key 1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax. FALSE 2. John told his nephew, Steve, if you maintain my house when I cannot, I will leave the house to you when I die. Steve maintained the house and when John died Steve inherited the house. The value of the residence must be included in Steves gross income. TRUE 3. Brooke works part-time as a waitress in a restaurant. For groups of 7 or more customers, the customer is charged 15% of the bill for Brookes services. For parties of less than 7, the tips are voluntary. Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers. Using the customary 15% rate, her voluntary tips would have been only $6,000. Brooke must include $18,000 ($11,000 + $7,000) in gross income. TRUE 4. Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wifes employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mels Federal gross income from the above is $2,500. TRUE 5. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income. FALSE 6. Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Eds gross income. Eds wife is required to recognize as gross income the $46,000 she received. FALSE 7. Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wifes medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 $12,000) in gross income. FALSE 8. When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000 and Insurance Purchase, Inc., became the beneficiary. She had paid total premiums of $19,000. Betty died 8 months after the sale. Insurance Purchase, Inc., collected $50,000 on the policy. The company had paid additional premiums of $4,000 on the policy. Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc., is required to recognize a $14,000 gain from the insurance policy. TRUE 9. Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school. TRUE 10. If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income. FALSE 11. Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income. TRUE 12. In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013. Emily can exclude the $2,500 from her gross income in 2012. TRUE 13. Because graduate teaching assistantships are awarded on the basis of academic achievement, the payments are generally scholarships and therefore are excluded from gross income. FALSE 14. In 2012, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramons negligence. In 2013, Theresa collected from his insurance company. She received $15,000 for loss of income, $25,000 punitive damages, and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above, Theresas 2013 gross income is increased by $33,000. TRUE 15. Workers compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury. FALSE 16. Sam was unemployed for the first two months of 2011. During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers compensation benefits. Sams Federal gross income from the above is $18,000 ($4,000 + $14,000). TRUE 17. Sarahs employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income. TRUE 18. Megs employer carries insurance on its employees that will pay an employee his or her regular while salary the employee is away from work due to illness. The premiums for Megs coverage were $1,200. Meg was absent from work for two months as a result of a kidney infection. Megs employers insurance company paid Megs regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg is not taxed on any of the above amounts. FALSE 19. Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody isnot required to recognize any gross income from the HSA for the year. TRUE 20. If an employer pays for the employees long-term care insurance premiums, the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income. FALSE 21. Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole. FALSE 22. Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income. TRUE 23. Roger is in the 35% marginal tax bracket. Rogers employer has created a flexible spending account for medical and dental expenses that are not covered by the companys health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Under the plan, he must forfeit the $100 unused amount. His after-tax cost of overfunding the plan is $65. TRUE 24. Mauve Company permits employees to occasionally use the copying machine for personal purposes. The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine. However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier. The use of the copy machine may be excluded from gross income as a de minimis fringe benefit. TRUE 25. Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost. FALSE 26. Nicoles employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work. The employer also pays the cost of the rail pass, $75 per month. Nicole can exclude both of these payments from her gross income. TRUE 27. A U.S. citizen who works in France from February 1, 2011 until January 31, 2012 is not eligible for the foreign earned income exclusion in 2011 but is eligible for it in 2012. FALSE 28. Generally, a U.S. citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income. FALSE 29. Calvins property was taken by the State of Louisiana to build a highway overpass. He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award. Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award. FALSE 30. A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2012. His total itemized deductions in 2012 were $18,000. In 2013, he received a $900 refund of his 2012 state income tax. The taxpayer must include the $900 refund in his 2013 Federal gross income in accordance with the tax benefit rule. TRUE 31. The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2012 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2013. The taxpayer must add $5,000 to his 2013 gross income in accordance with the tax benefit rule to correct for the 2012 error. FALSE 32. Mother participated in a qualified state tuition program for the benefit of her son. She contributed $15,000. When the son entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for her son, Mother must include $5,000 ($20,000 $15,000) in her gross income. FALSE 33. The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account. FALSE 34. Benny loaned $100,000 to his controlled corporation. When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt. The corporation should treat the cancellation as a nontaxable contribution to capital. TRUE 35. A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income. TRUE 36. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted. FALSE 37. The taxpayers marginal tax bracket is 25%. Which would the taxpayer prefer? A. $1.00 taxable income rather than $1.00 tax-exempt income. B. $.80 tax-exempt income rather than $1.00 taxable incom C. $1.25 taxable income rather than $1.00 tax-exempt inco D. $1.30 taxable income rather than $1.00 tax-exempt inco E. None of the above. 38. Cash received by an individual: A. Is not included in gross income if it was not earned. B. Is not taxable unless the payor is legally obligated to ma C. Must always be included in gross income. D. May be included in gross income although the payor payment. E. None of the above. 39. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she made it all possible. The necklace was worth $10,000, but she already owned more jewelry than she desired. A. The neckla Sharon be required to B. The value of the necklace is not included in Sharons gr C. The value of the necklace is not included in Sharons gr information was an illegal act and the SEC can confisca D. The value of the necklace must be included in Sharons received by her. E. None of the above. 40. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income: A. $0 . B. $2,500. C. $10,000. D. $25,000. E. None of the above. 41. Iris collected $100,000 on her deceased husbands life insurance policy. The policy was purchased by the husbands employer under a group policy. Iriss husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $12,500 each. A. None of the payments mu included in Iriss gross inc B. The first 8 payments are a return of her capital and thus income from the policy until she receives the ninth paym C. For each $12,500 payment that Iris receives, she can e $12,500) from gross income. D. For each $12,500 that Iris receives, she can exclude fro ($5,000/$125,000 $12,500). E. None of the above. 42. Turquoise Company purchased a life insurance policy on the companys chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joes widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy. A. Rebecca c proceeds o must includ $400,000) B. Turquoise Company and Rebecca can exclude the life and $100,000, respectively, from gross income. C. Turquoise Company can exclude $1,100,000 ($1,500,0 but Rebecca must include $84,000 in gross income. D. Turquoise Company must include $1,100,000 ($1,500,0 and Rebecca must include $100,000 in gross income. E. None of the above. 43. Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customers loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan: A. Must recognize $1,500 in from the life insurance p B. Must recognize $1,300 income from the life insurance p C. Does not recognize income because life insurance proc D. Does not recognize income from the life insurance beca of capital. E. None of the above. 44. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctors diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. 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 gros income. B. Both Ben and Henry must recognize $38,000 ($50,000 income. C. Henry must recognize $38,000 ($50,000 $12,000) of recognize any gross income. D. Ben must recognize $38,000 ($50,000 $12,000) of gr recognize any gross income. E. None of the above. 45. Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $10,000 of premiums on the policy. The insurance company has offered to pay him $75,000 to cancel the policy, although its cash surrender value was only $60,000. Albert accepted the $75,000. Albert used $5,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy: A. Albert is gross income b illness. B. Albert must recognize $65,000 ($75,000 $10,000) of g income. C. Albert must recognize $10,000 ($75,000 $60,000 $5 income. D. Albert must recognize $75,000 of gross income, but he expenses. E. None of the above. 46. A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: A. Only tuition. B. Tuition, books, and supplies. C. Tuition, books, supplies, meals, and lodging. D. Meals and lodging. E. None of the above. 47. Ron, age 19, is a full-time graduate student at City University. During 2012, he received the following payments: State scholarship for ten months (tuition and books) Loan from college financial aid office Cash support from parents Cash award for being the outstanding resident adviser Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Rons adjusted gross income for 2012? A. $1,500. B. $4,000. C. $7,500. D. $15,500. E. None of the above. 48. Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barneys gross income from the above is: A. $0 . B. $6,300. C. $11,300. D. $12,800. E. None of the above. 49. Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jenas gross income for the year is: A. $10,0 00. B. $4,000. C. $3,000. D. $500. E. None of the above. 50. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company directly to each childs educational institution and are payable only if the student maintains a B average. A. The tuition excluded fr scholarship B. The tuition payments of $10,000 each must be included C. The tuition payments of $30,000 may be excluded from payments are for the academic achievements of the ch D. The tuition payments of $30,000 must be included in Ol E. None of the above. 51. The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. A. The $13,500 is exc is used to pay for tu B. The $13,500 is taxable compensation. C. The $13,500 is considered a scholarship and, therefore D. The $13,500 is excluded because the total amount rece standard deduction and personal exemption. E. None of the above. 52. In 2012, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashads negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashads employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages. Ambers insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalids original claim and Ambers offer? A. Ambers of punitive da and sufferi B. Ambers offer is $10,500 less. [($30,000 .35) = $10,50 C. Ambers offer is $19,500 less. [$30,000(1 .35) = $19,500]. D. Ambers offer is $5,000 more. [$70,000 (1 .35)($100 $65,000]. E. None of the above. 53. Christie sued her former employer for a back injury she suffered on the job in 2011. As a result of the injury, she was partially disabled. In 2012, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employers flagrant disregard for the employees safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2011 return, reducing her taxable income by $12,000. Christies 2012 gross income from the above is: A. $415, 000. B. $412,000. C. $255,000. D. $175,000. E. $172,000. 54. Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased Damage settlement to replace his lost salary What is the amount that Marion must include in gross income for the current year? A. $25,000. B. $15,000. C. $12,500. D. $10,000. E. $0. 55. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income: A. $700, 000. B. $500,000. C. $490,000 [($700,000/$1,000,000) $700,000]. D. $0. E. None of the above. 56. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: A. $0 . B. $100,000. C. $120,000. D. $270,000. E. None of the above. 57. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: A. $10,0 00. B. $50,000. C. $60,000. D. $85,000. E. None of the above. 58. The exclusion for health insurance premiums paid by the employer applies to: A. Only current employees and their spouses. B. Only current employees and their spouses and depend C. Only current employees and their disabled spouses. D. Present employees, retired former employees, and thei E. None of the above. 59. Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $4,000 from her employer. For the next 60 days, she received $6,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $2,000 on an income replacement policy she had purchased. Of the $12,000 she received, Julie must include in gross income: A. $0 . B. $4,000. C. $8,000. D. $10,000. E. $12,000. 60. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employees health savings account (HSA). Matildas employer made the contributions in 2011 and 2012, and the account earned $100 interest in 2012. At the end of 2012, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2012 gross income: A. $0 . B. $100. C. $1,600. D. $3,100. E. None of the above. 61. All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employees hospitalization insurance premiums. If the change is made, the employees after-tax and insurance pay will: A. Increase by the same amount for all employees. B. Increase more for the highly paid employees (35% mar C. Increase more for the low income (10% and 15% margi D. Decrease by the same amount for all employees. E. None of the above. 62. The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance. A. If an emplo and the em bracket, th offer. B. If an employees wages are reduced by $4,000 and the tax bracket, the employee would benefit from the offer. C. If an employees wages are reduced by $6,000 and the tax bracket, the employee would benefit from the offer. D. a., b., and c. E. None of the above. 63. James, a cash basis taxpayer, received the following compensation and fringe benefits in 2012: Salary Disability income protection premiums Long-term care insurance premiums His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on Jamess credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Jamess gross income from the above? A. $66,000. B. $72,000. C. $73,000. D. $75,000. E. None of the above. 64. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casinos employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct? A. All the employ the value of th B. Only the restaurant employees may exclude the value o C. Only the employees who work in gambling, the bar, and meals from gross income. D. All of the employees may exclude the value of the meal E. None of the above. 65. Section 119 excludes the value of meals from the employees gross income: A. Whenever the employee working during the norm mealtimes. B. When the employer pays for the meals, if the employee employer. C. When the meals are provided for the employee, on the as a convenience to the employer. D. When the meals are provided for the employee on the e convenience to the employee. E. None of the above. 66. Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income. A. $0 . B. $800 per month. C. $2,100 per month. D. $1,890 ($2,100 .90). E. None of the above. 67. Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. A. Adam must include the reimbursement in his gross income. B. Adam can exclude the reimbursement from his gross in for the convenience of the employer. C. Adam can exclude the reimbursement from his gross in the employers business premises (the truck). D. Adam may exclude from his gross income the differenc meals and what it would have cost him to eat at home. E. None of the above. 68. Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the meals. What is Tommys gross income from working as a resident advisor? A. $1,800, the entire value of the contract is compensation B. $1,000, only the lodging contract must be included in gr C. $800, only the meal contract must be included in gross D. $0, the entire value of the contract is excluded from gro E. None of the above. 69. Under the Swan Companys cafeteria plan, all full- time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. I. II. III. IV. Group medical and hospitalization insurance for the employee Group medical and hospitalization insurance for the employee Child-care payments, actual cost but not more than $4,800 a y Cash required to bring the total of benefits and cash to $8,000 Which of the following statements is true? A. Sam, a full-time employee, selects choices II and III and must include the $2,000. B. Paul, a full-time employee, elects to receive $8,000 cas provided these same insurance benefits for him. Paul is in gross income. C. Sue, a full-time employee, elects to receive choices I, II to include $3,200 in gross income. D. All of the above. E. None of the above. 70. Heather is a full-time employee of the Drake Company and participates in the companys flexible spending plan that is available to all employees. Which of the following is correct? A. Heather re spent $1,5 reimbursem expenses. reduced by B. Heather reduced her salary by $1,200, and received on actual medical expenses. She is not refunded the $300 income is reduced by $1,200. C. Heather reduced her salary by $1,200, and received on medical expenses. She is not refunded the $400. Her g D. Heather reduced her salary by $1,200, and received on medical expenses. She forfeits the $300. Her gross inco E. None of the above. 71. Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round. A. Tom must include $800 in gross income. B. Tom is not required to include anything in gross income benefit. C. Tom is not required to include the $800 in gross income a gift. D. Tom is not required to include anything in gross income cost service fringe benefit. E. None of the above. 72. The Royal Motor Company manufactures automobiles. Employees of the company can buy a new automobile for Royals cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealers cost. Officers of Local Dealer are allowed to use a company vehicle (for personal use) at no cost. A. None of th the fringe b required to B. Employees of Royal are required to recognize as gross of the automobile purchased. C. Employees of Local Dealer are required to recognize as Dealer loses as a result of the sale to the employees. D. Local Dealer officers must recognize gross income from vehicles. E. None of the above. 73. Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tans cost was $9,000. The company also paid for Peggys parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees parking fees. Peggys gross income from the above is: A. $0 . B. $600. C. $3,500. D. $4,100. E. None of the above. 74. The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organizations agenda for its meetings. The copies made during the year would have cost $150 at a local office supply. A. Ed must include $150 in his gross income. B. Ed may exclude the cost of the copies as a no-additiona C. Ed may exclude the cost of the copies only if the organi D. Ed may exclude the cost of the copies as a de minimis E. None of the above. 75. The Perfection Tax Service gives employees $12.50 as supper money when they are required to work overtime, approximately 25 days each year. The supper money received: A. Must be included in the employees gross income. B. Must be included in the employees gross income if the supper. C. May be excluded from the employees gross income as D. May be excluded from the employees gross income as E. None of the above. 76. The president of Silver Corporation is assigned a secretary. When the secretary has completed work on company matters, the secretary is available to do the presidents personal matters (pick up laundry, buy groceries) so long as the privilege is not abused. No other employee has a personal secretary. A. The value to the pres additionalB. The value of the secretarys services provided to the pr the president did not receive cash. C. The value of the secretarys services provided to the pr additional-cost services because the services are D. If the value of secretarys services are considered the benefit from gross income even through other empl benefit. E. None of the above. 77. Evaluate the following statements: I. II. III. De minimis fringe benefits are those that are so immaterial that acc De minimis fringe benefits are subject to strict anti-discrimination re Generally, a fringe benefit of less than $50 is considered de minimis A. Only I is true. B. Only III is true. C. Only I and III are true. D. I, II, and III are true. E. None of the above. 78. Kristens employer owns its building and provides parking space for its employees. The value of the free parking is $150 per month. Karens employer does not have parking facilities, but reimburses its employee for the cost of parking in a nearby garage, up to $150 per month. A. Kristen and Karen m gross income from services. B. Kristen can exclude the employer provided parking from include her reimbursement in gross income. C. Kristen must include the value of the employer provided Karen can exclude her reimbursement from gross incom D. Neither Kristen nor Karen is required to include the cos E. None of the above. 79. A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500. A. Both employees must i benefits received in gro B. The officer must include $500 in gross income. C. The officer must include $1,500 in gross income. D. The hourly employee must include $1,000 in gross inco E. None of the above. 80. A U.S. citizen worked in a foreign country for the period July 1, 2011 through August 1, 2012. Her salary was $10,000 per month. Also, in 2011 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2012. Which of the following is correct? A. The taxpay gross incom earned in t than the an exclusion, included in B. The taxpayer can exclude a portion of the compensatio 2011 and 2012, but must include the dividend income o C. The taxpayer can exclude from U.S. gross income $60, taxpayer will exceed the twelve month limitation and, th compensation must be included in gross income. All of 2011 gross income. D. The taxpayer can exclude a portion of the salary from U and all of the dividend income. E. None of the above. 81. Louise works in a foreign branch of her employers business. She earned $5,000 per month throughout the relevant period. A. If Louise w May 1, 201 exclude $4 and exclud B. If Louise worked in the foreign branch from May 1, 2011 exclude anything from gross income because she was days in either year. C. If Louise began work in the foreign country on May 1, 2 November 30, 2012 in order to exclude $55,000 from g 2011. D. Louise will not be allowed to exclude any foreign earned than $95,100. E. None of the above. 82. In the case of interest income from state and Federal bonds: A. Interest on received b to that stat B. Interest on United States government bonds is subject C. Interest on bonds issued by State A received by a resid income tax in State B. D. All of the above are correct. E. None of the above are correct. 83. Heathers interest and gains on investments for 2012 were as follows: Interest on Bland County school bonds Interest on U.S. government bonds Interest on a Federal income tax refund Gain on the sale of Bland County school bonds Heathers gross income from the above is: A. $2,000. B. $1,800. C. $1,400. D. $1,300. E. None of the above. 84. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk. A. If she buys interest, he greater tha school bon B. If she buys a U.S. government bond paying 6%, her aft if she purchased the York County school bond. C. If she buys a common stock paying 6% dividend, her af than if she purchased the York County school bond. D. All of the above are correct. E. None of the above are correct. 85. Doug and Pattie received the following interest income in the current year: Savings account at Greenbacks Bank United States Treasury bonds Interest on State of Virginia bonds Interest on Federal tax refund Interest on state income tax refund Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return? A. $4,775. B. $4,675. C. $4,575. D. $4,300. E. None of the above. 86. George, an unmarried cash basis taxpayer, received the following amounts during 2012: Interest on savings accounts Interest portion of proceeds of a bank certificate of deposit purchased on July 1, 2010, and matured on June 30, 2012 (under DID rules for 2012) Dividends on USG common stock Interest on a Federal income tax refund Interest on City of Radford school bonds What amount should George report as gross income from dividends and interest for 2012? A. $4,050. B. $4,500. C. $4,800. D. $6,000. E. None of the above. 87. Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuarts gross income from the receipt of the additional Turquoise and Blue shares is: A. $0 . B. $4,800. C. $7,200. D. $12,000. E. None of the above. 88. Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds: A. Is gross inco the bond in t B. Is gross income to the student in the year the interest is C. Is included in the students gross income in the year the redeemed to pay educational expenses. D. Is not included in anyones gross income if the proceed E. None of the above. 89. The exclusion of interest on educational savings bonds: A. Applies only to savings bonds owned by the child. B. Applies to parents who purchase bonds for which the p education. C. Means that the child must include the interest in income D. Does apply even if used to pay for room and board. E. None of the above. 90. Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition. A. Martha mu $6,000) in are used to B. Martha must include the portion of the $2,000 accumula (i.e., interest). C. Marthas son must include the $2,000 ($8,000 $6,000 funds are used to pay the tuition. D. Neither Martha nor her son must include the $2,000 in g E. None of the above. 91. In December 2012, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2013 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2012 tax return. He had $150,000 of taxable income that year. On June 30, 2013, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: A. Todd should amen and claim $500 les expense. B. Todd should include the $500 in 2013 gross income in a C. Todd should add the $500 to his sales proceeds from th D. Todd should include the $500 in 2013 gross income in a doctrine. E. None of the above. 92. Tonya is a cash basis taxpayer. In 2012, she paid state income taxes of $6,000. In early 2013, she filed her 2012 state income tax return and received a $600 refund. A. If Tonya ite her Federa deductions by at least return to re B. If Tonya itemized her deductions in 2012 on her Federa deductions exceeded the standard deduction by at leas her 2013 gross income. C. If Tonya itemized her deductions in 2012, she must ame return and use the standard deduction. D. Tonya must recognize $600 as income from discharge o E. None of the above. 93. Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal. A. Harold must recognize ($80,000 $60,000) o income. B. Harold is not required to recognize gross income, but m to $130,000. C. Harold is not required to recognize gross income, since D. Jewel must recognize gross income of $20,000 ($80,00 debt. E. None of the above. 94. Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt. A. Hazel did not realiz because she obtain illegally. B. Hazel is not required to include the $6,000 in gross inco gift to her. C. Hazel must include $6,000 in gross income from discha D. Hazel may exclude the $6,000 from gross income beca E. None of the above. 95. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Golds building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must: A. Include $40,000 in gross income. B. Reduce the basis in its assets by $40,000. C. Include $25,000 in gross income and reduce its basis in D. Include $15,000 in gross income and reduce its basis in E. None of the above. 96. On January 1, 2002, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant. On January 1, 2012, the company acquired the bonds on the open market for $11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following: A. The company must recognize a $500,000 gain. B. The company can make an election to recognize a $50 basis in the plant by $500,000. C. The company must recognize a $500,000 gain and incr plant by $500,000. D. The company can amortize the $500,000 gain, recogniz of the bonds. E. None of the above. 97. Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2012. The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Dennys monthly mortgage payments could be reduced to a manageable amount. Denny also had a vacation home with a mortgage whose payments were beyond his means. The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000. The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction. A. Denny is n as a result the mortga B. Denny is required to recognize $5,000 income from the vacation home, but has no gross income from the reduc personal residence. C. Denny is required to recognize $10,000 income from th vacation home, but nothing for the reduction in the mort D. Denny is required to recognize $10,000 income from th vacation home and $20,000 income for the reduction in residence. E. None of the above. 98. Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt. A. If Flora had the bank a the debt, a Flora does company m $10,000. B. If Flora had borrowed the funds from a bank, and the ba of the debt, when the value of the property is $80,000, F C. If Flora transfers to the bank other property, with a basis of $95,000, in full payment of the debt, Flora can recogn D. If the $95,000 is owed to the person who sold the prope accepts $85,000 in full payment for the debt, Flora does reduce its basis in the land. E. None of the above. 99. Sandy is married, files a joint return, and expects to be in the 28% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of $100,000. He paid $60,000 of premiums on the policy. His gain from cashing in the life insurance policy would be ordinary income. If he retains the policy, the insurance company will pay him $3,000 (3%) interest each year. Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds. a. What before-tax rate of return would Sandy be required to earn on the p return earned with the insurance company? b. Assume Sandy estimates he can earn a 6% before-tax rate of return on Assume he can earn a 6% return for the remainder of his life and that h before-tax rate of return. If Sandy expects to live 10 more years, which beneficiaries upon Sandys death? (Given: The future value of an annu is 12.19. The future value of an annuity in 10 years assuming a 2.16% a. If Sandy cashes in the policy, he must recognize a $40,000 gain and p $60,000) = $11,200]. Therefore, he will have only $88,800 to invest ($1 $3,000, the same as he receives from the insurance company, Sandy proceeds ($88,800 .03378 = $3,000). b. The life insurance proceeds will be exempt from income tax. Therefore receive $100,000 plus the compound amount of (1 .28)($3,000) = $2 will be reinvested at 6% before tax, or (1. .28)(.06) = 4.32% after-tax of 12.19, the annual income will accumulate to 12.19 $2,160 = $26,3 $100,000. Therefore, if Sandy retains the policy, his beneficiaries would expect to Sandy cashed in the policy, his beneficiaries will receive the after-tax a above, of $88,800, plus the compound amount of the earnings on the annual after-tax earnings on $88,800 is $3,836 (.0432 $88,800). This in 10 years. Therefore, his beneficiaries would receive $135,561 ($88, better alternative. 100. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverlys salary for the year prior to her death. The employer had a policy of making the salary payments to help out the family in the time of its greatest need. Beverlys spouse collected her interest in the employers qualified profit sharing plan amounting to $30,000. As beneficiary of his wifes life insurance policy, Beverlys spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax for Beverlys spouse? Salary and commissions Profit sharing plan Interest income Included in gross income All nonforfeitable rights to funds are includible in income (salary, commissions). This includes the accrued salary of $3,000. The collection of Beverlys interest in the profit sharing plan of $30,000 is subject to taxation. The $35,000 payment by the employer was pursuant to a policy of charity to families of deceased employees, and there is authority for excluding this item as a gift. The IRS will probably challenge the exclusion of the $35,000. The IRS would argue that a policy of making the payment to all families of deceased employees makes the payment appear to be in the nature of compensation for prior services. Life insurance proceeds are tax-exempt. However, all interest paid on life insurance proceeds is includible in gross income 101. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm Medical expenses Loss of wages Punitive damages The defendants insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)? Barbaras claim for punitive damages of $100,000 is the only taxable amount. Therefore, her after-tax proceeds from receiving the $340,000 would be $305,000 [$340,000 .35($100,000)]. None of the offer from the insurance company ($340,000) would be taxable and therefore her after-tax proceeds from the settlement would be $340,000. Thus, both the insurance company and Barbara would benefit from her accepting the insurance companys offer. 102. George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the companys cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The companys normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call? George will probably be required to recognize $120 income from the service contract. The company can sell the service contract to an employee at a 20% discount and the employee is not required to recognize income. George received a 100% discount; therefore, $120 (80% $150) must be included in his gross income. However, George can perhaps make a convincing argument that he is merely receiving a no-additional-cost service, and thus would not be required to recognize income. George will not be required to recognize income from the bargain purchase of the refrigerator because he paid more than the employers cost. 103. Sonja is a United States citizen who has worked in Spain for the past 10 months. She received $5,000 a month as compensation. Her employer has offered to extend Sonjas contract to work in Spain for another 5 months at the same rate of pay. If she rejects the offer, she can return to the United States and receive the same salary. While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay. The marginal tax rate on her income taxed in the United States is 25%. Compare Sonjas after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States. If Sonja returns to the United States, she will not be present in the foreign country for the requisite period (at least 330 days during any 12 consecutive months). Thus, she will not be eligible for the foreign earned income exclusion. Her income will be subject to the 25% rate in the United States. Although she will be given credit for the taxes paid in Spain, the net effect of not extending the stay is to increase her tax rate from 11% to 25% on her income for the 15month period (the original 10 months plus the additional 5 months under consideration). This would cost her $10,500 [(.25 .11) (15 $5,000)] in additional taxes. 104. Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return? Juan will receive $5,000 before-tax from the bond fund. The state income tax is $500 [(.10) ($5,000)]. The state income tax will be deductible on the Federal return; thus, the state taxes will reduce Juans after-tax income by only $325 [(1 .35)($500]. Therefore, the annual aftertax return is $4,675 ($5,000 $325), or 4.675%. The double-exempt bonds will yield 4.9% after tax; therefore, it is the preferred investment, assuming equal risks. 105. Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years. Her son will be in the 15% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program? Margaret can accumulate $11,948 by investing her funds for 4 years, but then she must pay the actual tuition. Alternatively, if she invests the $10,000 in a qualified tuition program, the tuition will be paid in 4 years, regardless of the amount. The amount of the tuition less the $10,000 will not be subject to tax. Thus, the after-tax future value of the qualified tuition fund is $12,155 ($12,155 $0), which is greater than the alternative accumulated value. Therefore, it appears that Margaret should participate. 106. Gull Corporation was undergoing reorganization under the bankruptcy laws. The shareholders, who had made loans of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on the debt. The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $250,000. A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand. Finally, the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000. Compute the corporations gross income and other adjustments necessary as a result of the above transactions. Gull is not required to recognize income from the shareholders exchanging the debt for stock (a nontaxable contribution to capital). The $80,000 reduction in debt ($150,000 $70,000) to trade creditors can be used to reduce the basis in the goods purchased. However, Gull is required to recognize $150,000 of gross income from the reduction in the mortgage held by Old Line, and must recognize $30,000 gain ($120,000 $90,000) from transferring the equipment in satisfaction of the debt. 107. Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60. She was practically penniless at the time of her death, owed a $12,000 hospital bill, and had a disabled spouse. The company was very concerned about its public image, and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means, the Board of Directors agreed to pay Carmens hospital bill and to give her spouse $6,000 per year for the rest of his life. Discuss both sides of the question whether Carmen (or her estate) and her spouse realize any taxable income from the above. The argument that Carmen and her spouse realize income from the payments is as follows: the employer was compensating for the employees prior services. The fact that the employer had no legal obligation to make the payments is not relevant since the employer realized a benefit (prevention of embarrassment). The argument that Carmen and her spouse do not realize income is predicated upon characterizing the payments as a gift. Conditions which indicate that a gift was intended include the following: the spouses dire financial condition; the decedent had been fully compensated for her past services, and any benefits the corporation received from the payments were indirect because there was no obligation to pay such amounts. The $12,000 hospital payment is taxable because the gift is likely taxable income to her estate, as income in respect of the decedent, because the gift exclusion does not apply to payments by the employer to the employee. 108. What are the tax problems associated with payments received by a wife from her deceased husbands employer? (Assume the wife renders no services to the employer.) An amount paid in respect of compensation owed to the employee at the time of his death is taxable to the spouse, just as the amount would have been taxable to the decedent if he had received the money prior to death. Additional noninvested amounts paid by the employer probably should be totally excluded from the spouses income as a gift. However, the IRS generally considers such payments to be compensation for past services rather than gifts. Payments received from the employers qualified pension or profit sharing plan are subject to taxation. Also, if the employee contributed to the pension and profit sharing plan, the beneficiary is allowed to treat this amount as a nontaxable recovery of capital. 109. Bob had a terminal illness and realized that he cant take it with him. Therefore, he cashed in his insurance policy and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda. Was Bobs behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use? No. Bob was permitted to exclude from his gross income the $70,000 gain ($120,000 $50,000) he realized from cashing in the policy. The exclusion was permitted because he was terminally ill. The rationale for the exclusion is that often the person with the terminal illness will have the need for funds to be used for his or her medical care. Bob is clearly not using the funds for this purpose to be served by the law. Nevertheless, the law does not prevent Bob from obtaining the exclusion. 110. Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an employer-sponsored income protection insurance policy. Bens employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses. Ben also collected on an income protection policy that he purchased. Which of the above sources of income are taxable? Explain the basis for excluding any item or items. Only the collections on the employer-sponsored income protection policy are subject to tax. The hospitalization benefits received from the employer sponsored plan are specifically excluded. Both the premiums and the payments can be excluded. The amounts Ben collected on a policy he purchased are specifically excluded under the rationale that the payments are a recovery of Bens premiums. 111. The CEO of Cirtronics Inc., discovered that the companys competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the companys employees. Cafeteria plans are beneficial where employees desire different types of benefits. This often occurs when employees are married and their spouses receive some benefits from their employers. For example, if the husband is covered by health insurance provided by his employer, there is no need for the wifes employer to provide coverage for the husband also. Moreover, some employees may need child care benefits while those without children may prefer cash. The cafeteria plan provides much greater flexibility in planning benefits. 112. What Federal income tax benefits are provided for college students? The Federal income tax system provides direct benefits to college students and indirect benefits by providing tax relief for the parents of the students. College students can receive tax-exempt scholarships. The interest on educational savings bonds, which are often purchased by parents may be exempt where the proceeds are used to pay qualified educational expenses. The qualified tuition program enables parents to fund the educational expenses of their children without any income being taxed to the parents or to children. 113. In 2012, Bobs unincorporated business has a net loss of $30,000. Bob has investment income of $40,000. Itemized deductions and personal exemptions total $26,000. Thus, on his 2012 tax return, his taxable income was a negative $16,000. In 2012, Bob discovered that an employee has stolen $25,000 (pocketing the proceeds from unrecorded sales) from the business. This $25,000 theft loss is included in calculating the net loss of Bobs business of $30,000. In 2013, Bob recovers the $25,000 from the former employee. How can the tax benefit rule assist Bob in 2013? Bob realizes a $25,000 increase in wealth when he receives the $25,000 from the former employee. However, under the tax benefit rule, his gross income is limited to $9,000. The income from the recovery of a prior deduction is limited to the amount that the deduction reduced taxable income. In this case, the $25,000 theft loss reduced taxable income by only $9,000. This results because if the theft had not occurred, Bobs 2012 tax return would have reflected $9,000 of taxable income [($30,000) + $40,000 $26,000 + $25,000]. 114. Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income. What are the effects of the exclusions on: a. The progressiveness of the tax system? b. The complexity of the tax system? a. b. 115. The benefit of an exclusion varies directly with the recipients marginal marginal tax rate enjoy the greatest benefit from the exclusion and tho enjoy the least benefit. Also, generally, the exclusions are often availab causes the tax system to be less progressive than if the exclusions we Any exclusion creates complexities in the system because tests must benefit is eligible (e.g., whether the benefit is provided on in a discrimi Also, often limitations are often created, which requires even more tes Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis. They each were able to convince the mortgage holder to reduce the principal amount on the mortgage. Sallys mortgage is on her personal residence and Eds mortgage is on rental property he owns. a. Explain whether each of these individuals has realized income from the b. Assume that under the current system of measuring income, each of th reductions in the mortgages. Should either of these taxpayers be permi income? a. b. 116. Each taxpayers liabilities were reduced. Therefore, their net worth has basis in the assets. Each taxpayer also experienced a loss in the value not realized (because each taxpayer still owns the property). Thus, ea debt, but no recognized loss. Fortunately, recent legislation permits the residence to exclude the amount of the debt reduction from gross inco is not eligible for the debt reduction exclusion. Allowing the exclusion from income for the homeowner but not for the a value system that says we should bend the otherwise equitable rules If a tax-exempt bond will yield approximately .65 (1 .35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors? The state and local governments benefit from the exemption because they are required to pay less interest. The exemption costs the Federal government, and thus the exemption shifts resources from the Federal to the state and local governments. The investors do not derive any benefit from the exemption, in this example, because the market drives the price of the exempt bonds upward so that the after-tax yields on the bonds are equal for investors in the highest marginal tax bracket (35%).

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CHAPTER 13-PROPERTY TRANSACTIONS:DETERMINATION OF GAIN OR LOSS, BASISCONSIDERATIONS, AND NONTAXABLE EXCHANGESPART 1 3 copy1. Realized gain or loss is measured by the difference between the amount realized from the sale orother disposition of property
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CHAPTER 17-CORPORATIONS: INTRODUCTION ANDOPERATING RULES 2 copy1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In thecurrent year both businesses make a net profit of $60,000. Neither business distributes any f
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Example Test QuestionsChapter 1Multiple Choice:1. Which of the following bodies has the ultimate authority to issue accounting pronouncements inthe United States?a. Securities and Exchange Commissionb. Financial Accounting Standards Boardc. Interna
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Example Test QuestionsChapter 2Multiple Choice1.Which early accounting theorist was among the first to express the view that all changesin the value of assets and liabilities should be reflected in the financial statements ?\a. A. C. Littletonb. Jo
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Example Test QuestionsChapter 3Multiple Choice1. Which of the following is not an environmental actor that could impact on thedevelopment of a countrys accounting system?a.i.1.a.Level of education\a.i.1.b.Political systema.i.1.c.Geographic locat
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Example Test QuestionsChapter 4Multiple Choice1. Which of the following research approaches emphasizes going from the specific to thegeneral?a. Deductiveb. Behavioralc. Inductived. PragmaticAnswer c2. Which of the following research approaches i
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Example Test QuestionsChapter 5Multiple Choice1. One concept of income suggests that income be measured by determining the net changeover time in the discounted present value of net cash flow expected to be received by thefirm. Under this concept of
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Example Test QuestionsChapter 6Multiple choice1. The disposal of a significant component of a business is calleda. A change in accounting principleb. An extraordinary itemc. An other expensed. Discontinued operationAnswer d2. If year one sales eq
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Example Test QuestionsChapter 7Multiple Choice1. On a balance sheet, what is the preferable presentation of notes or accounts receivablefrom officers, employees, or affiliated companies?a.As trade notes and accounts receivable if they otherwise qual
Hofstra - ACCT - 250
Example Test QuestionsChapter 8Multiple Choice1. Of the following items, the one that should be classified as a current asset isa.Trade installment receivables normally collectible in 18 monthsb.Cash designated for the redemption of callable prefer
Hofstra - ACCT - 250
Example Test QuestionsChapter 9Multiple Choicea.i.1.When a closely held corporation issues preferred stock for land, the land shouldbe recorded at thea. Total par value of the stock issuedb. Total book value of the stock issuedc. Appraised value o
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EXAMPLE TEST QUESTIONSChapter 10Multiple Choice1. Under the equity method of accounting for investments, an investor recognizes its shareof the earnings in the period in which thea. Investor sells the investmentb. Investee declares a dividendc. Inv
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 11Multiple Choice1. A loss from early extinguishment of debt, if material, should be reported as a componentof incomea. After cumulative effect f accounting changes and after discontinued operations ofa segment of a bus
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 12Multiple Choice1. With respect to the difference between taxable income and pretax accounting income, thetax effect of the undistributed earnings of a subsidiary included in consolidated incomeshould normally bea. Acc
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 131.Under the capital method of accounting for leases the excess of aggregate rentalsover the cost of leased property should be recognized as revenue of the lessora. In increasing amounts during the term of the leaseb.
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 14Multiple Choice1.APB Opinion No. 8 set minimum and maximum limits on the annual provisionfor pension cost. An amount that was always included in the calculation of both theminimum and the maximum limit isa. Normal co
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 15Multiple Choicea.i.1.For a compensatory stock option plan for which the date of grantand measurement date are the same, compensation cost should be recognized in theincome statementa. At the date of retirementb. Of
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 16Multiple Choice1. Consolidated statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., ifa. Neely owns 80 percent of the outstanding common stock of Randle and 40percent of Walker; Randle owns 30 percent
Hofstra - ACCT - 250
EXAMPLE TEST QUESTIONSChapter 17Multiple choice1. Footnotes to financial statements should not be used toa. Describe the nature and effect of a change in accounting principlesb. Identify substantial differences between book and tax incomec. Correct
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Chapter 01 - The Equity Method of Accounting for InvestmentsChapter 1 The Equity Method Of Accounting For InvestmentsChapter OutlineI. Three methods are principally used to account for an investment in equity securities along with a fair value option.
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 02-19 MARSHALL COMPANY Part a. Marshall and Tucker Consolidated Balances Marshall's acquisition of Tucker represents a bargain purchase because the fair value of the net assets acquired exceeds the
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Chapter 02 - Consolidation of Financial InformationCHAPTER 2 CONSOLIDATION OF FINANCIAL INFORMATIONMajor changes have occurred for financial reporting for business combinations beginning in 2009. These changes are documented FASB ASC Topic 805, Business
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 03-24 Part a. Michael Company and Aaron Company - Fair Value allocation and Annual Amortization Aaron fair value Book value of subsidiary Excess fair over book value Assigned to specific accounts b
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Chapter 03 - ConsolidationsSubsequent to the Date of Acquisition 1CHAPTER 3 CONSOLIDATIONSSUBSEQUENT TO THE DATE OF ACQUISITIONI. Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition. In all
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 04-32FATHER, INC. AND SAM CORPORATION - Purchase price allocation and annual amortization Acquisition-date subsidiary fair value Book value of subsidiary Fair value in excess of book value Allocat
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Chapter 04 - Consolidated Financial Statements and Outside OwnershipChapter OutlineI.CHAPTER 4 CONSOLIDATED FINANCIAL STATEMENTS AND OUTSIDE OWNERSHIPOutside ownership may be present within any business combination A. Complete ownership of a subsidiar
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 05-32 a. How was the balance in the Equity Earnings of Sander account determined? 2011 income reported by Sander Excess patent fair value amortization Deferred gross profit for 12/31/11 intra-entit
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Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset TransactionsCHAPTER 5 CONSOLIDATED FINANCIAL STATEMENTS - INTRA-ENTITY ASSET TRANSACTIONSChapter OutlineI. The transfer of assets between the companies forming a business combination i
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 06-39 ALBUQUERQUE, INCORPORATED General Journal Part a. Account Investment in Marmon Additional paid-in capital Part b. Account Additional paid-in capital Investment in MarmonDebit 16,000Credit 1
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Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other IssuesCHAPTER 6 VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT, CONSOLIDATED CASH FLOWS, AND OTHER ISSUESChapter OutlineI. Variable interest entities (VIEs) A
Hofstra - ACCT - 242
Student Name: Instructor Class: McGraw-Hill/Irwin Problem 07-25Calculation of deferred gains in beginning and ending inventory: Beginning unrealized gain (Wilson) January 1, 2011 Inventory Balance Transfer price Markup Cost Unrealized gain Ending unreali
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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income TaxesCHAPTER 7 CONSOLIDATED FINANCIAL STATEMENTS - OWNERSHIP PATTERNS AND INCOME TAXESChapter OutlineI. Indirect subsidiary control A. Control of subsidiary companies within
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Chapter 8 - Segment and Interim ReportingCHAPTER 8 SEGMENT AND INTERIM REPORTINGChapter OutlineI. In the past, consolidation of financial information made the analysis of diversified companies quite difficult. A. The consolidation process tends to obsc
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Chapter 09 - Foreign Currency Transactions and Hedging Foreign Exchange RiskCHAPTER 9 FOREIGN CURRENCY TRANSACTIONS AND HEDGING FOREIGN EXCHANGE RISKChapter OutlineI. In todays global economy, a great many companies deal in currencies other than their
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 10-31 a. Translation of Kingston Subsidiary Trial Balance Debits $12,960 14,580 4,860 8,100 4,860 8,100 17,100Correct! - Correct! - Correct! - Correct! - Correct! - Correct! - Correct! - - Correct
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Chapter 10 - Translation of Foreign Currency Financial StatementsCHAPTER 10 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTSChapter OutlineI. In today's global economy, many companies have invested in operations in foreign countries. A. In preparin
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Chapter 11 - Worldwide Accounting Diversity and International StandardsCHAPTER 11 WORLDWIDE ACCOUNTING DIVERSITY AND INTERNATIONAL STANDARDSChapter OutlineI. Accounting and financial reporting rules differ across countries. There are a variety of facto
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Chapter 12 - Financial Reporting and the Securities and Exchange CommissionCHAPTER 12 FINANCIAL REPORTING AND THE SECURITIES AND EXCHANGE COMMISSIONChapter Outline I. In the United States, the Securities and Exchange Commission (SEC), created by Actof
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Chapter 13 - Accounting for Legal Reorganizations and LiquidationsCHAPTER 13 ACCOUNTING FOR LEGAL REORGANIZATIONS AND LIQUIDATIONSChapter OutlineI. Because of a myriad of possible financial or business difficulties, a company may become insolvent, unab
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Chapter 14 - Partnerships: Formation and OperationCHAPTER 14 PARTNERSHIPS: FORMATION AND OPERATIONChapter OutlineI. Business organizations that are formed legally as partnerships, although they are not always as visible as corporations, still prolifera
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Chapter 15 - Partnerships: Termination and LiquidationCHAPTER 15 PARTNERSHIPS: TERMINATION AND LIQUIDATIONChapter OutlineI. The termination of a partnership and liquidation of its property may take place for a number of reasons. A. The death, withdrawa
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 16-32 FUND-BASED FINANCIAL STATEMENTS General Journal a. General Fund Estimated Revenue Control Estimated Other Financing Sources Control (Budgetary) Fund Balance Appropriations Control b. Capital
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Chapter 16 Accounting For State and Local Governments (Part One)CHAPTER 16 ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS (PART ONE)Chapter OutlineI. State and local government units produce two complete and distinct sets of financial statements which are
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Chapter 17 - Accounting for State and Local Governments (Part Two)CHAPTER 17 ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS (PART TWO)Chapter OutlineI. Government entities often obtain property by lease rather than by purchase. A. Leases are recorded as ei
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Student Name: Instructor Class: McGraw-Hill/Irwin Problem 18-37 Local Not-for-profit Health Care Entity General Journal a. Investments - Internally Restricted Cash Cash Contributed Support - Permanently Restricted Net Assets Inventory of Medicines Cash Re
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Chapter 18 - Accounting and Reporting for Private Not-for-Profit OrganizationsCHAPTER 18 ACCOUNTING AND REPORTING FOR PRIVATE NOT-FOR-PROFIT ORGANIZATIONSChapter OutlineI. Historically, the financial reporting for private not-for-profit entities has di
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Chapter 19 - Accounting for Estates and TrustsCHAPTER 19 ACCOUNTING FOR ESTATES AND TRUSTSChapter OutlineI. Estate accounting encompasses the recording and reporting of events that occur from the time of a person's death until distribution of all prope
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Student Name: Class:INSTRUCTOR McGraw Hill/Irwin Step-by-Step ProblemNote: Follow the Step-by-Step instructions in the Guide to Individual Problems to work this problem. WILLAMETTE CONSULTING Income Statement For the Month Ended June 30, 20xx Revenues:
Anadolu University - BUSINESS A - 1332
DescriptionLocated in EskiehirSpecializes Home&Office FurnitureThere are 3 main rivalsWe have %10 market shareOur aim is to be on the top of Turkish marketMissionWe produce high quality furniture products that makescomfortable the lives of our cus
HKU - HUMA - 2010
Question: "Understanding" is a kind of mental activity, thus a rather abstract concept. How to expressconcepts related to "understanding / understand" (including "know", "understand", "realize", "clear [inmind]", "recognize", "be quick of understanding"
HKU - HUMA - 2010
Solution to Exercise Two: Conceptual Metaphor1. Figure out the conceptual metaphor from each of the following sentences. [e.g.He went out of view. Answer: THE VISUAL FIELD IS A CONTAINER.](1) I am going to be married.Answer: STATES ARE LOCATIONS, and
HKU - HUMA - 2010
Exercise Two: Identifying Conceptual Metaphors1. Figure out the conceptual metaphor from EACH of the following sentences. [e.g. He went out ofview. Answer: THE VISUAL FIELD IS A CONTAINER.](1) I am going to be married.(2) My car has gone from bad to w
HKU - HUMA - 2010
EXERCISE 3 QUIZ (SOLUTION)[Note: Exercise 3 is a past quiz paper, and therefore what follows is not merely a set of solutions,but answers with detailed analyses of students mistakes or inadequate answers.][Convention: The instructors answers are given
HKU - HUMA - 2010
HUMA 201 Metaphors in English and ChineseQuizHUMA 201 METAPHORS IN ENGLISH AND CHINESEQUIZInstructions to Students(A) Write down your name on the first page of the Exam Paper. (B) Before leavingthe classroom, make sure that you have handed in both t
HKU - HUMA - 2010
Exercise Four: Past Final Exam QuestionsSolutions1. Figure out the conceptual metaphor in the following sentence.[e.g. He went out of view. Answer: THE VISUAL FIELD IS A CONTAINER.]How do you reach that conclusion?Answer: THINKING IS MOVING. (Some fl
HKU - HUMA - 2010
Exercise Four: Past Final Exam QuestionsThe following questions are all taken from past final exam papers. Solutions to be provided later.1. Figure out the conceptual metaphor in the following sentence.[e.g. He went out of view. Answer: THE VISUAL FIEL
HKU - HUMA - 2010
Exercise 05: Solution(1) Solution: It looks like a combination of Moving Time and Moving Ego, with and as clues: Time moves forward, and we should also make progress side byside with the passing time. More examples of this kind can be found in both Ch
HKU - HUMA - 2010
Exercise 5: Time as space in ChineseExamine the following sentences, each of which instantiates a TIME AS SPACE metaphor. Find outwhich are based on Moving Time and which are based on Moving Ego, and explain how you reachyour conclusion.(1) (2) (3)
HKU - HUMA - 2010
Exercise 6: Conceptual Metaphor: More Exercises1. Below are 4 groups of sentences; each group instantiates a single conceptualmetaphor. Identify the conceptual metaphor in each group, in the format of X IS Y.1.1 Group One:(1) That idea went out of sty
HKU - HUMA - 2010
Exercise 6: Conceptual Metaphor - More Exercises1. Below are 4 groups of sentences; each group instantiates a single conceptual metaphor.Identify the conceptual metaphor in each group, in the format of X IS Y.1.1 Group One:(1) That idea went out of st
HKU - HUMA - 2010
HUMA 201 Metaphors in English and ChineseQuizHUMA 2 01 METAPHORS IN ENGLISH AND CHINESEQ UIZ : SOLUTION(version 2, updated May 08)Total Points: 25+70=951. Multiple Choice Questions (From the four options in each question, check one only. Choose the