311-Chapter 3 Homework Solutions

# 311-Chapter 3 Homework Solutions - ACC 311 Chapter 3...

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ACC 311 Chapter 3 Assignment #1 7. What is the difference between earned income and unearned income? Earned income is a payment for human capital. That is, it results from the provision of labor and services for which payment or a profit (in the case of a sole proprietor) is received. Unearned income is a payment for a return on an investment. The taxpayer invests money or other assets. An amount is received for the use of the assets. There is no direct investment of human capital. 31. Two Sisters is a partnership that owns and operates a farm. During the current year, the partnership raised and harvested hay at a cost of \$20,000. It then traded half the hay for quarter horse breeding stock---young horses worth \$30,000. Two Sisters fed the remainder of the hay to the horses, which was worth \$50,000 at the end of the year. How much income does the partnership have from these transactions during the current year? Two Sisters realized \$30,000 for hay that cost \$10,000 (\$20,000 x 50%) when it exchanged the hay for the horses. Therefore, it has \$20,000 (\$30,000 - \$10,000) of income from the exchange. The value of the hay that was fed to the horses remains unrealized. Even though the horse's value has increased \$20,000 (\$50,000 - \$30,000) by the end of the year, the increase has not been realized in an arm's- length transaction and no income is recognized. Note: Two Sisters could deduct the \$10,000 cost of the hay that was fed to the horses in the current year. 40. Minnie owns a qualified annuity that cost \$78,000. The annuity is to pay Minnie \$650 per month for life after she reaches age 65. Minnie turns 65 on September 28, 2007, and receives her first payment on Nov. 1, 2007. a. How much gross income does Minnie have from the annuity payments she receives in 2007? The nontaxable portion of an annuity payment is determined using the annuity exclusion ratio. To determine the monthly amount that can be excluded, the recipient divides their investment in the annuity by the number of months the annuity is expected to be received. Because the annuity is based on the life of the taxpayer, the number of months the annuity is expected to be received determined using the annuity table for a single taxpayer (Table 3-1). Minnie is age 65 when she begins receiving the annuity payments and her expected number of payments is 260. Her monthly exclusion of \$300 (\$78,000 ÷ 260 months) represents the monthly return of her \$78,000 investment. Minnie must include the remaining \$350 of each payment in gross income because it represents the return on her

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investment. Her 2007 gross income from the annuity is \$700 (\$350 x 2 payments): Monthly amount to be excluded: \$78,000 ÷ 260 = \$300 Payment received \$ 650 Excluded amount ( 300 ) Taxable amount \$ 350 b. Shortly after receiving her payment on October 1, 2022, Minnie is killed in an automobile accident. How does the executor of Minnie's estate account for the annuity on her return for the year 2022? The 2022 payments will be treated as \$3,500 (\$350 x 10 months) of
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311-Chapter 3 Homework Solutions - ACC 311 Chapter 3...

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