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 stockyoung 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 31).
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