Chapter 4 Solutions
The $950,000 is economic income and gross income for tax purposes. Sue
realized $950,000 from the termination of her coaching contract and must include
the entire amount in her gross income.
Pay for not performing is treated the same
as pay for performing.
The $10,000 is economic income and gross income for tax purposes. However, a
portion of the amount may be taxed at the parents’ marginal tax rate.
The increase in value of $100,000 is economic income but is not gross income for
tax purposes because the realization requirement has not been satisfied. For tax
purposes, the gross income is $0. The taxpayer is not required to recognize the
increased value as income until it is realized (e.g., when the property is sold).
Winn’s economic income $899,995 (the winnings less the cost of the ticket). For
tax purposes, he has $900,000 in gross income. However, the $5 may be
deductible as an itemized deduction for tax purposes.
Larry has economic income of $1,800 from the production in his garden.
However, for tax purposes no income is realized. The realization requirement is
not satisfied because the vegetables are consumed by Larry and his family, rather
than sold to others.
pp. 4-4 to 4-6
Accrual basis gross receipts
Less: beginning accounts receivable
Less: bank loan
Add: ending accounts receivable
Cost of goods sold:
pp. 4-8 to 4-10
Hoffman, Smith, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
October 1, 2010
Ms. Amanda Sims
100 James Tower