EXAMINATION II REVIEW QUESTIONS

EXAMINATION II REVIEW QUESTIONS - EXAMINATION II REVIEW...

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EXAMINATION II REVIEW QUESTIONS ACCOUNTING 305 TRUE/FALSE 1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income and $1,538 [$1,000/(1 – .35)] of taxable income yield the same after-tax income. ANS: T $1,538 of income that is subject to taxation yields $1,000 [$1,538 × (1 – .35)] after-tax income. PTS: 1 REF: p. 5-2 2. Wilbur owns a farm worth $100,000. He said to his nephew, “Peter, if you will take care of my farm for the rest of my life, you can have it when I die.” Wilbur’s will conveyed the farm to Peter. At the time of Wilbur’s death, the farm was worth $150,000. When Wilbur dies, Peter must include $150,000 in his gross income. ANS: T The farm was received for services and therefore the nephew has gross income of $150,000. PTS: 1 REF: p. 5-5 3. The Red Tire Company had such a good year that the owner decided to give all of the employees a $500 Christmas bonus. None of the employees had expected to receive the bonus. The employees may exclude the $500 from gross income as a gift. ANS: F Section 102(c) provides that gifts made by an employer to an employee do not qualify for exclusion treatment. PTS: 1 REF: p. 5-5 4. Marvin was the beneficiary of a $50,000 group term life insurance policy on his wife. His wife’s employer paid all of the premiums on the policy. Marvin used the life insurance proceeds to purchase a United States Government bond, which paid him $2,000 interest during the current year. Marvin’s Federal gross income from the above is $2,000. ANS: T The $2,000 interest on United States Government bonds must be included in gross income. The life insurance proceeds of $50,000 are excluded from gross income. PTS: 1 REF: p. 5-6 | p. 5-7 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 upon the death of his wife. He used the insurance proceeds to purchase a United States Government bond, which paid him $2,000 interest income during the year. Zack is not required to recognize any income from the above transactions. ANS: F The interest income of $2,000 is included in gross income because it is a taxable bond. The life insurance proceeds of $50,000 are excludible under § 101(a). PTS: 1 REF: p. 5-6 | p. 5-7 1
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6. Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death. Ed’s wife is not required to recognize any income from the receipt of the $55,000. ANS: F The $5,000 accrued salary Ed had earned must be included in his wife’s gross income. The life insurance proceeds of $50,000 are excluded. PTS:
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EXAMINATION II REVIEW QUESTIONS - EXAMINATION II REVIEW...

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