Assignment
Question 1. On June 30, 20X2, Jill, a cash basis taxpayer, gave Tina a bond with a $25,000 face amount that pays $2,500 interest each December 31. When Tina collected the interest on December 31, 20X2, _____.
Jill must include all of the interest in her gross income
Tina must include all of the interest in her gross income
Jill must report $1,250 interest income, and Tina must report $1,250 interest income
Jill must recognize $1,250 of interest income at the time of the gift
Tina must recognize $25,000 of income at the time of the gift
Question 2. Roger, age 19, is a full-time student at State College and a candidate for a bachelor's degree. During 20X2, he received the following payments.
State scholarship for 10 months (tuition and books) $3,600
Loan from college financial aid office $1,500
Cash support from parents $3,000
Interest on CDs $1,700
Cash prize awarded in contest $500
What is Roger's adjusted gross income for 20X2?
$1,700
$2,200
$5,800
$10,300
None of the above
Interest on CDs $1,700
Cash prize awarded in contest $500
Gross income =$2,200
Question 3. Determine which statements are true given the following information.
Floral Company owed $100,000 to the National Bank.
If Floral transfers land with a cost of $60,000 in payment of the debt, then Floral must recognize $40,000 income.
If Floral pays the bank $60,000 in settlement of the liability, then Floral has $40,000 income from discharge of indebtedness.
If Floral pays the bank $60,000 in settlement of the liability and Floral is insolvent, then Floral can elect to reduce its basis in assets by $40,000 (in lieu of recognizing $40,000 gain).
(Points : 2)
I, II, and III are true.
I, II, and III are false.
I and II are true; III is false.
II and III are true; I is false.
None of the above
Question 4. Mallard Auto Parts Inc. has 1,000 fenders for 1953 Studebakers on hand. Mallard purchased the fenders in 1965 for $30 each, and the selling price is $400 each. Only rarely does Mallard sell a Studebaker fender, and it is highly unlikely that more than 100 of the remaining fenders will ever be sold. But Mallard has ample storage space and feels an obligation to Studebaker owners. Therefore, the company will not salvage the fenders and will continue to sell them for $400 each. Scrap value of the fenders is $5 each. Under the lower-of-cost-or-market inventory method, _____.
Mallard can expense the 900 excess fenders
Mallard can expense all 1,000 of the fenders because of the unlikelihood that they will be sold
the fenders should be valued at $7,500 ([100 × $30] + [900 × $5])
the fenders should be valued at $5,000 (1,000 × $5)
None of the above
Question 5. Martha participated in a qualified tuition program for the benefit of her son. She invested $5,000 in the fund. 4 years later, her son withdrew $7,500, the entire balance in the program, to pay his college tuition.
Martha must include the $2,500 ($7,500 - $5,000) in her gross income when the funds are used to pay the tuition.
Martha must include the portion of the $2,500 accumulated each year in her gross income (i.e., interest).
Martha's son must include the $2,500 ($7,500 - $5,000) in his gross income when the funds are used to pay the tuition.
Martha's son must include the portion of the $2,500 accumulated each year in his gross income (i.e., interest).
None of the above
Question 6. Generally, deductions for additions to reserves (e.g., an allowance for estimated warranty costs) are not allowed for income tax purposes because allowing the deduction would _____.
result in a mismatching of revenues and expenses
violate the doctrine of constructive receipt
reduce the costs of companies selling defective products
violate the economic performance requirement
None of the above
Question 7. Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in 2 years. The note bore interest of 11% when the applicable federal rate was 7%. Hal's cost of the land was $40,000. Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000. Which of the following is true?
Hal can elect to treat the $36,000 as a recovery of capital.
Hal must recognize the $70,000 gain in the year of sale.
Hal must recognize the $60,000 gain in the year of sale.
Unless Hal elects not to use the installment method, Hal must recognize $21,600 gain in the year of sale.
None of the above
Question 8. Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in 3 years. Which of the following is true?
Interest will be imputed, thus increasing the capital gain.
Interest will be imputed, thus creating ordinary income.
Interest will not be imputed because the contract is for less than 5 years.
Interest will be imputed, thus reducing the seller's total income from the transactions.
None of the above
Question 9. Joan cancels a note issued by Jan (Joan's daughter) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Joan of $10,000, a face amount of $25,000, and a fair market value of $20,000. Presuming the initial sale by Joan qualified as an installment sale, the cancellation results in Joan recognizing a gain of _____.
$25,000
$15,000
$0
$10,000
None of the above
Question 10. Which of the following is an exclusion from wage and salary taxable income?
Working condition and de minimis fringes
Certain tuition deductions
Rental value of parsonages
Health savings account
All of the above.