Question 1

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

Accepted Answer

A)   The $1,500,000 is not taxable because it represents a recovery of capital.
B)   The $1,500,000 is taxable because Detroit has no basis in the goodwill.
C)   The $1,500,000 is not taxable because Detroit did nothing to earn the money.
D)   The $1,500,000 is not taxable because Detroit settled the case.
E)   None of these.F) A) and B)
G) A) and C)

Question 2

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2015,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 2,2016.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2016.

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Accepted Answer

A) True 
 B)False

Question 5

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Accepted Answer

A)   All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B)   The OID will be included in gross income for the year of purchase.
C)   The interest income will be the same each year.
D)   The interest income will be greater in the third year than in the first year.
E)   None of these is correct.F) B) and C)
G) A) and E)

Question 6

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 not required to impute interest income.

Accepted Answer

A) True 
 B)False

Question 7

With respect to the prepaid income from services,which of the following is true?

Accepted Answer

A)   The treatment of prepaid income is the same for tax and financial accounting.
B)   A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
C)   An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
D)   An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
E)   None of these.F) A) and C)
G) C) and D)

Question 8

Sarah,a majority shareholder in Teal,Inc. ,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Accepted Answer

A)   Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
B)   Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
C)   Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
D)   Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
E)   None of these.F) A) and B)
G) D) and E)

Question 9

Turquoise Company purchased a life insurance policy on the company's chief executive officer,Joe.After the company had paid $400,000 in premiums,Joe died and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow,Rebecca,received the $100,000 proceeds from the group term life insurance policy.

Accepted Answer

A)   Rebecca can exclude the life insurance proceeds of $100,000,but Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income.
B)   Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000,respectively,from gross income.
C)   Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000) from gross income,but Rebecca must include $84,000 in gross income.
D)   Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income and Rebecca must include $100,000 in gross income.
E)   None of these.F) A) and B)
G) B) and E)

Question 10

With respect to income from services,which of the following is true?

Accepted Answer

A)   The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
B)   A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C)   If an accrual basis taxpayer sells a 36-month service contract on July 1,2015 for $3,600,the taxpayer's 2015 gross income from the contract is $600.
D)   If an accrual basis taxpayer sells a 24-month service contract on July 1,2015,one-half (12/24) the income is recognized in 2016.
E)   None of these.F) A) and E)
G) B) and E)

Question 11

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Accepted Answer

A)   Freddy must recognize $1,218 gross income in 2015.
B)   Freddy must recognize $1,218 gross income in 2017.
C)   Freddy must recognize $600 (.03 × $20,000) gross income in 2017.
D)   Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2015.
E)   None of these.F) A) and D)
G) A) and C)

Question 12

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

A)   Is taxed when the individual dies and the heirs collect the insurance proceeds.
B)   Must be included in gross income each year under the original issue discount rules.
C)   Reduces the deduction for life insurance expense.
D)   Is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value.
E)   None of these.F) A) and E)
G) C) and E)

Question 13

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Accepted Answer

A) True 
 B)False

Question 14

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Accepted Answer

A)   Tim must include all of the interest in his gross income.
B)   Jane must report $1,800 gross income for 2015.
C)   Jane reports $1,350 of interest income in 2015,and Tim reports $450 of interest income in 2015.
D)   Jane reports $450 of interest income in 2015,and Tim reports $1,350 of interest income in 2015.
E)   None of these is correct.F) A) and D)
G) D) and E)

Question 15

If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?

Accepted Answer

The state and local governments benefit ...

Question 16

In the case of a zero interest below-market loan by a corporation to a shareholder-employee,what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Accepted Answer

Imputed interest on the loan to an emplo...

Question 17

The Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

Accepted Answer

A)   $60,000.
B)   $50,000.
C)   $10,000.
D)   $0.
E)   None of these.F) B) and C)
G) A) and D)

Question 18

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Accepted Answer

A) True 
 B)False

Question 19

In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

Accepted Answer

A) True 
 B)False

Question 20

Gold Company was experiencing financial difficulties,but was not bankrupt or insolvent.The National Bank,which held a mortgage on other real estate owned by Gold,reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver,Inc.Pink,Inc. ,the holder of a mortgage on Gold's building,agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above,Gold must:

Accepted Answer

A)   Include $40,000 in gross income.
B)   Reduce the basis in its assets by $40,000.
C)   Include $25,000 in gross income and reduce its basis in its assets by $15,000.
D)   Include $15,000 in gross income and reduce its basis in the building by $25,000.
E)   None of these.F) B) and E)
G) A) and E)

Exam 4: Gross Income

If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?

Correct Answer
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The state and local governments benefit ...
View Answer

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Correct Answer
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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.

Correct Answer
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Correct Answer
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In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

Correct Answer
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The annual increase in the cash surrender value of a life insurance policy:

Correct Answer
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Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Correct Answer
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With respect to income from services,which of the following is true?

Correct Answer
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Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Correct Answer
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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 not required to impute interest income.

Correct Answer
verified

Sarah,a majority shareholder in Teal,Inc. ,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Correct Answer
verified

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Correct Answer
verified

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Correct Answer
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In the case of a zero interest below-market loan by a corporation to a shareholder-employee,what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Correct Answer
verified
Imputed interest on the loan to an emplo...
View Answer

Correct Answer
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Correct Answer
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With respect to the prepaid income from services,which of the following is true?

Correct Answer
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Correct Answer
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When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Correct Answer
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Correct Answer
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Exam 4: Gross Income

If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?

Correct AnswerverifiedThe state and local governments benefit ...View AnswerShow Answer

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

Correct AnswerverifiedShow Answer

The annual increase in the cash surrender value of a life insurance policy:

Correct AnswerverifiedShow Answer

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Correct AnswerverifiedShow Answer

With respect to income from services,which of the following is true?

Correct AnswerverifiedShow Answer

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Correct AnswerverifiedShow Answer

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 not required to impute interest income.

Correct AnswerverifiedShow Answer

Sarah,a majority shareholder in Teal,Inc. ,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Correct AnswerverifiedShow Answer

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Correct AnswerverifiedShow Answer

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Correct AnswerverifiedShow Answer

In the case of a zero interest below-market loan by a corporation to a shareholder-employee,what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Correct AnswerverifiedImputed interest on the loan to an emplo...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

With respect to the prepaid income from services,which of the following is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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The state and local governments benefit ...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Imputed interest on the loan to an emplo...
View Answer

Correct Answer
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