TAX 4001, Taxation of Business Entities
Practice Questions for Exam #1
Solutions begin on page 5
. The constructive receipt doctrine:
a. Does not apply to accrual basis taxpayers.
b. Does not apply to cash basis taxpayers.
c. Is used to distinguish unearned income from earned income.
d. Means that a taxpayer cannot plan transactions to defer the recognition of
e. Provides an opportunity for a cash method taxpayer to delay the reporting of
. Home Cable TV Company, an accrual basis taxpayer, allows its customers to pay by
the month ($25 each month), by the year ($280 per year), or two years in advance
($540). In December 2008, the company collected the following amounts applicable to
January 2009-December 2010 services (two-year contracts), $270,000
January 2009 – December 2009 services (one-year contracts), $1,120,000
January 2009 services (monthly contracts), $350,000
December 2008 services (monthly contracts), $100,000
How much of the above income must be reported as gross income in
2008, 2009, and
. Answer #2 again, assuming Home Cable TV Company uses the cash-method of
Assume your marginal tax rate is 40% (combined Federal and state rates). Which
would you prefer?
a. $1.40 taxable income rather than $1.00 tax-exempt income.
b. $.60 tax-exempt income rather than $1.00 taxable income.
c. $1.50 taxable income rather than $1.00 tax-exempt income.
d. $1.70 taxable income rather than $1.00 tax exempt income.
e. Two of the above. Which two? ______________________.
Green Company purchased a $1 million life insurance policy on the company’s chief
executive officer, Howard. After the company had paid $300,000 in premiums, Howard
died and the company collected the $1 million face amount of the policy. The company
also purchased group-term life insurance on all its employees. Howard’s widow, Agnes,
received the $150,000 proceeds from the group-term life insurance policy. How much
include in their gross income?