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Exam 4: Gross Income

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Question 51

True/False

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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.

A) True
B) False

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Question 52

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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:

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) A) and B)
G) All of the above

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Question 53

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Heather's interest and gains on investments for the current year are as follows: $\begin{array} { l r } \text { Interest on Madison County school bonds } & \$ 600 \\\text { Interest on U.S. government bonds } & 700 \\\text { Interest on a Federal income tax refund } & 200 \\\text { Gain on the sale of Madison County school bonds } & 500\end{array}$ ? Heather's adjusted gross income from the above is: or; ? Heather must report gross income in the amount of: ?

Freddy purchased a certificate of deposit for $20,000 on July 1, 2017.The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.

In early 2016, Ben sold a yacht, held for 9 months and for pleasure, for a $5,000 gain.Concerned about offsetting the gain before year-end, Ben is considering selling one of the following-each of which would yield a $5,000 loss: ∙ Houseboat used for recreation. ∙ Truck used in business. ∙ Stock investment held for 13 months. Evaluate each choice.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Gull Corporation was undergoing reorganization under the bankruptcy laws.The shareholders, who had made loans of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on the debt.The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally, the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

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

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2016.The dividend checks were mailed on December 31, 2016.Ed, a cash basis shareholder, received the dividend check on January 2, 2017.Ed cannot delay reporting the income from the dividend until 2017.

On January 1, 2007, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1, 2017, the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following:

Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2017.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2018.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

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.

Perry is in the 33% tax bracket.During 2017, he had the following capital asset transactions: $\begin{array}{lr}\text { Gain from the sale of a stamp collection (held for 10 years) } & \$ 30,000 \\\text { Gain from the sale of an investment in land (held for 4 years) } & 10,000 \\\text { Gain from the sale of stock investment (held for 8 months) } & 4,000\end{array}$ Perry's tax consequences from these gains are as follows:

Doug and Pattie received the following interest income in the current year: $\begin{array} { l r } \text { Savings account at Greenbacks Bank } & \$ 4,000 \\\text { United States Treasury bonds } & 250 \\\text { Interest on State of Iowa bonds } & 200 \\\text { Interest on Federal tax refund } & 150 \\\text { Interest on state income tax refund } & 75\end{array}$ ? Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account.What amount of interest income should they report on their joint income tax return?

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2017.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18, 2017.

Under the formula for taxing Social Security benefits, low income taxpayers are not required to include any of the Social Security benefits in gross income.But as income increases, 50% of the Social Security benefits may be included in gross income.Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax.Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

Frank sold his personal use automobile for a loss of $9,000.He also sold a personal coin collection for a gain of $10,000.As a result of these sales, $10,000 is subject to income tax.

Calvin miscalculated his income in 2015 and overpaid his state income tax by $10,000.In 2016, he amended his 2015 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2015, deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2016, Calvin must recognize $10,900 of gross income.