Chapter 4 Solutions

Chapter 4 Solutions - Chapter 4 Solutions 26 Allison dies...

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Chapter 4 Solutions 26. Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequences of the receipt of each installment. Life insurance proceeds are excluded from tax. Therefore, the $1,000,000 face value of the policy is excluded as it is received. However, the earnings on the policy during the time it is held by the insurance company are not excludable. The total interest earned is $200,000 [($120,000 x 10) - $1,000,000]. As each payment on the policy is received, Bob will exclude $100,000 ($1,000,000 ÷ 10) and include $20,000 ($200,000 ÷ 10) in gross income. 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? Earl has $7,000 ($6,000 + $1,000) of income from the receipt of the free room and board. Even if the room and board were considered to be a scholarship, it could not be excluded because it is designated for payment of costs that are not direct education costs. The $5,000 general scholarship is excluded because it is less than the actual direct costs. NOTE: Earl may be able to exclude the value of the room and board and the $1,000 tuition reduction if it meets the requirements for meals and lodging provided by an employer. To exclude the value of meals, the meals must be provided on the employer's premises and be for the convenience of the employer. The same requirements are applicable to lodging with the extra provision that the lodging be required in order to accept employment. In determining whether this exclusion applies, one would first have to determine whether Earl is an employee of the residence hall. Assuming that he is, it does not seem that the meals would meet the convenience of employer test (there is no advantage to the employer in having Earl eat in the residence hall cafeteria) and would not be excludable. The lodging would meet the convenience test and would be excludable.
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28. Assume the same facts as in problem 27, except that Earl is not a residence hall assistant and his general scholarship is for $10,000. Scholarships can be excluded up to the amount of the direct education costs. In case a, the scholarship is less than the $8,000 of direct costs and fully excludable. In case b, the scholarship exceeds Earl's direct costs and he is taxed on the $2,000 excess. 29. Fawn receives a $2,500 scholarship to State University. Discuss the
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This note was uploaded on 02/22/2012 for the course ACCT 403 taught by Professor White during the Spring '11 term at South Carolina.

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Chapter 4 Solutions - Chapter 4 Solutions 26 Allison dies...

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