1. The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.
a. True
b. False
2. Judy is a cash basis attorney. In 2014, 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 2014.
a. True
b. False
3. 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
4. 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. Nicholass economic income for the year exceeded his gross income for tax purposes.
a. True
b. False
5. The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.
a. True
b. False
6. The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.
a. True
b. False
7. A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2013 that will pay $1,100 upon its maturity on June 30, 2015. The taxpayer must recognize a portion of the income in 2014.
a. True
b. False
8. 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 notrequired to recognize the $291 ($1,000 $709) original issue discount until the bond matures. However, Ralph can elect to amortize the discount over the ten-year period.
a. True
b. False
9. A sole proprietorship purchased an asset for $1,000 in 2014 and its value was $1,500 at the end of 2014. In 2015, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2015 but an economic loss of $100 in 2015.
a. True
b. False
.
10.At the beginning of 2014, 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 $1,240 of income from the certificate of deposit in 2014, and $3,600 from the Series EE bonds in 2023.
a. True
b. False
11.In 2005, Terry purchased land for $150,000. In 2014, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terrys 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
b. False
12.In December 2013, Mary collected the December 2013 and January 2014 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2013 for the 2014 rent should be included in her 2014 gross income.
a. True
b. False
13.On December 1, 2014, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2014 and $12,000 for January 2015. Daniel must include the $24,000 in 2014 gross income.
a. True
b. False
14.On January 1, 2014, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months. The amount received for the contract was $2,400. The taxpayer should report $1,600 of income in 2015.
a. True
b. False
15.An advance payment received in June 2014 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.
a. True
b. False
16.In 2014, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counteroffered that he would receive $900,000 per year for 4 years beginning in 2015. The team accepted the counteroffer. Juan constructively received $3 million in 2014.
a. True
b. False
17.The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does notapply to accrual basis taxpayers.
a. True
b. False
18.Fred is a full-time teacher. He has written a book and receives royalties from it. Freds mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son, Fred. This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support. Fred must include the amount of the royalty check in his gross income.
a. True
b. False
19.Jessica is a cash basis taxpayer. When Jessica failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from Jessicas salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.
a. True
b. False
20.ABC Corporation declared a dividend for taxpayers of record as of December 24, 2013. The dividend checks were mailed on December 31, 2013. Ed, a cash basis shareholder, received the dividend check on January 2, 2014. Ed cannot delay reporting the income from the dividend until 2014.
a. True
b. False
21.Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Toms interest income from the bond for the year is $500.
a. True
b. False
22.When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.
a. True
b. False
23.Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2014, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2015. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2015.
a. True
b. False
24.Jake is the sole shareholder of an S corporation that earned $60,000 in 2014. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2014. Jake is required to recognize $60,000 of income from the S corporation in 2014.
a. True
b. False
25.The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryans gross income from the partnership for the year is $60,000.
a. True
b. False
26.When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporations income even though the S corporation did not distribute the income to the shareholder.
a. True
b. False
27.Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnerships profits for 2014 is $90,000. Only $40,000 was distributed to him in January 2014, and this was his share of the 2013 partnership profits. None of the 2014 profits were distributed . Marks gross income from the partnership for 2014 is $40,000.
a. True
b. False
.
28.Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2014, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2015, before Rhonda filed her 2014 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2015. Things were going well in 2015 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnerships 2014 earnings. The partnerships income for 2015 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2014 and $18,000 in 2015.
a. True
b. False
29.April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2014, the partnership had $400,000 net income and for fiscal year ending September 30, 2015, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. Aprils gross income from the partnership for 2014 is $160,000 ($400,000 × 40%).
a. True
b. False
30.Alvin is the sole shareholder of an S corporation that earned $200,000 in 2014 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2014.
a. True
b. False
31.Samantha and her son, Brent, are cash basis taxpayers. Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000. On the date of the gift, March 31, 2014, the accrued interest on the bond was $100. On December 31, 2014, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.
a. True
b. False
32.In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.
a. True
b. False
33.Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.
a. True
b. False
.
34.George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.
a. True
b. False
35.After the divorce, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child. Jeffs payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year, Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.
a. True
b. False
36.Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paulas cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for $100,000. Freds recognized gain from the sale of the stock is $5,000.
a. True
b. False
37.Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.
a. True
b. False
38.Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.
a. True
b. False
39.If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.
a. True
b. False
40.Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is notrequired to impute interest income.
a. True
b. False