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CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS SOLUTIONS TO ASSIGNED PROBLEMS 7. a. The income should be reported in 2009. In 2008, Jared has not received anything of value. b. The significance of when the income is recognized by Jared relates to (1) the time value of money—if the tax is deferred, the present value of the tax decreases; and (2) the marginal tax rates—the taxpayer may be subject to different rates between years because of changes in the tax law, changes in his or her taxable income, changes in the taxpayer’s filing status, and changes in the entity status. pp. 4-7 to 4-9 11. The revenue must be recognized by Parchment, an accrual basis taxpayer, when all the events have occurred to fix the company’s right to receive the income. Under the original terms, the income is recognized when the customer receives the goods. Any returns reduce taxable income in the year the customer returns the goods. Under the proposed terms, no income would be recognized until the customer agrees to retain the goods. p. 4-13 23. The entire $8,000 must be included in her gross income because she has lived longer than her life expectancy (18.4 years according to Table 4-1). She has recovered all of her cost of the annuity over the previous 19 years. pp. 4-27 to 4-30 29. a. Olga has $300 of interest income and a recognized gain of $500 ($10,800 – $300 – $10,000). b. Olga does not recognize income from using the stock as collateral for the debt. Her assets (cash) and liabilities increased by the same amount, and she continued to own the stock. Thus, there is no realized gain. c. Mere increases in the value of an asset are not included in gross income. Note the attorney’s fee should be added to Olga’s cost of the property in calculating her basis for the vacant lot. pp. 4-3 to 4-6 31. a. Gross income using cash method: Cash collections from customers $150,000 Under the cash method, income is recognized when cash or its equivalent is actually or constructively received, regardless of when it was actually earned. Neither gross income nor taxable income is affected by the uncollectible accounts. Income was not 4-1
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4-2 2009 Individual Volume/Solutions Manual recognized when the income was earned. The deposit is not Al’s money. Rather, Al is the agent holding the money on behalf of the client. b. Gross income using accrual method: Cash collections $150,000 Less: Beginning accounts receivable (25,000) Plus: Ending accounts receivable 60,000 $185,000 c. Al should use the cash method so that he will not have to pay income taxes on uncollected accounts receivable. pp. 4-7 to 4-9 37. a. The $1,200 advance payment can be deferred until 2008 because the property was not delivered until 2008 and the revenue was not recognized for financial accounting purposes until 2008.
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