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Chapter 3: Determining Gross Income 1Chapter 3Determining Gross IncomeNote to Instructor: Thereference tables in the appendix of the text may be required for a limited number of answers to the questions and problems in this chapter. This is indicated by “REFERENCE TABLES REQUIRED” after the learning objective.True-False: Insert Tfor Trueor Ffor Falsebefore each question._____ 1. Income must be realized before it can be recognized.ANSWER: TRUE LO: 3.1DIFFICULTY: Easy_____ 2. When income is taxed in a different period than it is accrued for financial accounting, there is a timing difference.LO: 3.1DIFFICULTY: Easy_____ 3. When a taxpayer has a tax year of less than 12 months, the taxpayer must always annualize income.LO: 3.2DIFFICULTY: Easy_____ 4. A calendar year always ends on December 31.LO: 3.2DIFFICULTY: Easy_____ 5. All taxpayers may use the accrual method of determining income but certain taxpayers may not use the cash method.LO: 3.2DIFFICULTY: Easy_____ 6. Constructive receipt requires an accrual basis taxpayer to recognize income when the taxpayer has an unrestricted right to a payment that is to be received.LO: 3.2DIFFICULTY: Moderate_____ 7. The installment method of income recognition is an application of the wherewithal to pay concept.LO: 3.2DIFFICULTY: Easy_____ 8. The completed contract method requires income to be recognized annually based on the costs incurred inthat year.LO: 3.2DIFFICULTY: Easy
2Taxation for Decision Makers Test Bank _____ 9. The completed contract method allows the taxpayer to defer taxes on the contract income.LO: 3.2DIFFICULTY: Easy_____ 10. The assignment of income doctrine allows one taxpayer to assign income to another taxpayer for tax purposes.LO: 3.3DIFFICULTY: Easy_____ 11. Community property states allow income to be taxed to a person who did not earn the income.LO: 3.3DIFFICULTY: Easy_____ 12. All government bonds are exempt from the application of the OID rules.LO: 3.4DIFFICULTY: Easy_____ 13. When a corporation lends money to an employee at below-market interest rates, the imputed interest is additional compensation to the employee.LO: 3.4DIFFICULTY: Easy_____ 14. Most stock dividends are nontaxable.LO: 3.4DIFFICULTY: Easy_____ 15. Qualified dividends are dividends that are eligible for the reduced tax rates for dividend income.LO: 3.4DIFFICULTY: Easy_____ 16. Multiplying the annuity amount received by the ratio of the investment in the annuity to the expected returndetermines the annuity’s taxable portion.LO: 3.4DIFFICULTY: Moderate_____ 17. Up to 85 percent of a person’s Social Security benefits may be included in gross income.LO: 3.4DIFFICULTY: Easy_____ 18. If a beneficiary of a life insurance policy receives the insurance proceeds over time in installments, then each installment received is fully taxable.