ch4 - 1. The realization requirement gives an incentive to...

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1. The realization requirement gives an incentive to sell assets that have increased in value and to retain assets whose value has decreased. a. True *b. False 2. The realization requirement applies to taxable income but not to the economist’s concept of income. *a. True b. False 3. Judy is a cash basis attorney. In 2011, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for 2011. *a. True b. False 4. Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income. a. True *b. False 5. Nicholas owned stock that decreased in value by $20,000 during the year, but he did not sell the stock. He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld. Nicholas saved $10,000 of his salary and used the remainder for personal living expenses. Nicholas’s economic income for the year exceeded his gross income for tax purposes. a. True *b. False 6. If the taxpayer’s method of measuring income is consistent with GAAP, it will be acceptable for tax purposes. a. True *b. False 7. The financial accounting principle of conservatism is not well- suited to the task of measuring taxable income. *a. True b. False
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8. A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2011 that will pay $1,100 upon its maturity on June 30, 2013. The taxpayer must recognize a portion of the income in 2011. *a. True b. False 9. Ralph purchased his first Series EE bond during the year. He paid $709 for a 10-year bond with a $1,000 maturity value. The yield to maturity on the bonds was 3.5%. Ralph is not required to recognize the $291 ($1,000 – $709) original issue discount until the bond matures. *a. True b. False 10. At the beginning of 2011, Mary purchased a 3-year certificate of deposit (CD) for $8,760. The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize income from the certificate of deposit each year, 2011-2013, and $3,600 from the Series EE bonds in 2020. *a. True b. False 11. In 2003, Terry purchased land for $150,000. In 2011, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry’s property. Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land. *a. True
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ch4 - 1. The realization requirement gives an incentive to...

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