Unformatted text preview: interest is included in Gibbs’ income when it is added to his account
c. The interest is included in Gibbs’ income when he withdraws it from the
d. The interest is included in Gibbs’ income when he spends it.
The correct answer is b.
When interest is paid on the CD and added to Gibbs’ account balance, that interest must
be included in Gibbs’ income even if he does not withdraw the interest from his account.
The interest is includible in Gibbs’ income because, even though he has not withdrawn it, it
has been constructively received. The interest is constructively received because it is readily
available to Gibbs and is not subject to any substantial limitations or restrictions. 2. Patrick owns 100 shares of Darling Company stock. On December 29, 2006, Darling
Company prepared the dividend checks for its shareholders. On December 31, 2006,
Darling Company mailed dividend checks to all of its shareholders. Patrick did not receive
his dividend check until January 3, 2007. On what date must Patrick include the dividends
in his income?
a. Patrick is not required to include the dividends in his income.
b. Patrick must include the dividends in his income on December 29, 2006.
c. Patrick must include the dividends in his income on December 31, 2006.
d. Patrick must include the dividends in his income on January 3, 2007.
The correct answer is d.
Patrick is not required to include the dividends in his income until 2007 because the dividends were not readily available to Patrick in 2006. MULTIPLE CHOICE P ROBLEMS 25 3. Trip loans $11,000 to his sister, Tish. Should interest be imputed on this loan?
a. Interest would not be imputed because the loan is less than the amount of the
gift tax annual exclusion.
b. Interest would be imputed because loans of $100,000 or less are always exempt
from both income tax and gift tax consequences.
c. Interest would be imputed if Tish has unearned income of $1,100.
d. Interest would not be imputed if Tish’s earned income is less than $1,000.
The correct answer is c.
Answer a is incorrect because gift loans do not qualify for the gift tax annual exclusion.
Answer b is incorrect; loans of less than $10,000 are exempt from both income tax and gift
tax consequences. Answer d is incorrect because whether interest is imputed on this loan is
based on Tish’s level of unearned income, not earned income. Answer c is correct; because
the loan was for more than $10,000 and Tish has unearned income of more than $1,000,
interest should be imputed on the loan.
4. George is awarded $55,000 in compensatory damages for harm to his reputation and
$30,000 in compensatory damages for bodily injury. In addition, he was awarded $275,000
in punitive damages. How much of these awards must George recognize in income?
The correct answer is c.
Only compensatory damages for bodily injury are excludible from gross income. Compensatory damages without bodily injury are includible as are punitive damages. Therefore,
George must include $330,000 ($...
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This note was uploaded on 08/20/2013 for the course ACCT 330 taught by Professor Staff during the Spring '12 term at Western Kentucky University.
- Spring '12