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311-Chapter 4 Homework Solutions

311-Chapter 4 Homework Solutions - Chapter 4 Homework...

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Chapter 4 Homework Solutions Assignment #1 8. Distinguish group term life insurance from whole life insurance. Group-term life insurance is insurance provided for a group of employees for a limited term. The policy will only pay the beneficiaries if the employee dies during the term of the policy. Term insurance is only insurance, there is no savings component. A whole-life insurance policy is a policy on a single individual for the life of the individual. That is, in contrast to term insurance, once the policy is paid for, the proceeds are always paid at death. Whole life insurance includes an insurance component and a savings component (i.e., it has a cash surrender value) 21. A fire extensively damaged a small Alaska town where Intech Company had its primary plant. Intech decided to give $200 to each household that lost its residence. About 12% of the payments were made to Intech employees. Is the receipt of $200 by some Intech employees taxable as compensation or excludable as a gift? The question to be resolved is whether the payments made to Intech employees are gifts (excluded) or are a form of compensation. In order to be a gift, the payment must be made with a "detached and disinterested generosity" that is out of "affection, respect, admiration, charity, or like impulses." In making this determination, the courts have held that it is the intention of the transferor that is the controlling factor in determining whether a payment is a gift. The facts would indicate that the payments to Intech employees do constitute gifts. Because Intech gave $200 to all households that suffered damage, the payments show detachment (payments to individuals that are not its employees) and charitable intent (helping out the community), with no specific intent to compensate its employees. 24. Herman inherits stock with a fair market value of $100,000 from his grandfather on March 1. On May 1, Herman sells half of the stock at a gain of $10,000 and invests the $60,000 proceeds in Jordan County school bonds. The bonds' annual interest rate is 6%, which is paid on July 31 and January 31. On October 15, Herman receives a $2,200 dividend on the remaining shares of stock. How much gross income does Herman have from these transactions? Herman must include the $10,000 capital gain from the sale of half of the stock and the $2,200 of dividend income in his gross income. The receipt of the inherited stock is excluded from income. However, any subsequent earnings on the stock is not part of the inheritance and must be included in gross income. The interest Herman receives from the Jordan County school bonds is excludable municipal bond interest.
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27. Earl is a student at Aggie Tech. He receives a $5,000 general scholarship for his outstanding grades in previous years. Earl is also a residence hall assistant, for which he receives a $1,000 tuition reduction and free room and board worth $6,000 per year. Earl's annual costs for tuition, books, and supplies are $8,000. Does Earl have any taxable income from the scholarship or the free room and board?
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311-Chapter 4 Homework Solutions - Chapter 4 Homework...

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