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Exam 3: Income Sources

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Question 31

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Karl is an employee of Cars-R-Us. As part of their employment agreement, Cars-R-Us loans Karl $1,000,000 interest-free to assist in the purchase of a car dealership. Assume the federal rate of interest is 8%. What is the tax treatment of the loan? I.The arrangement has no tax consequences to Karl. II.Cars-R-Us is deemed to have paid Karl compensation of $80,000. III.Karl is deemed to have paid Cars-R-Us $80,000 of interest. IV.Cars-R-Us' net income tax effect is zero due to this arrangement. ​

A) Only statement I is correct.
B) Only statements I, II, and IV are correct.
C) Only statement III is correct.
D) Only statements I, II, and III are correct.
E) Only statements II, III, and IV are correct.

F) D) and E)
G) A) and E)

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Question 32

Multiple Choice

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Teresa won $9,000 playing the Illinois lottery. Which of the following statements is/are correct? I.Teresa must include the $9,000 in gross income. II.The All-inclusive Income Concept applies to this situation. III.Legislative Grace allows Teresa to exclude lottery winnings from recognition. ​

A) Only statement I is correct.
B) Only statement II is correct.
C) Only statement III is correct.
D) Only statements I and II are correct.
E) Statements I, II, and III are correct.

F) B) and E)
G) A) and D)

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Question 33

Multiple Choice

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Frank and Lilly are negotiating a divorce settlement. Frank has offered to pay Lilly $12,000 each year for 10 years, but payments cease upon Lilly's death. What are the tax implications of this proposition assuming it is finalized in 2018? I.Lilly must recognize Gross Income when the money is received. II.Frank has a deduction for Adjusted Gross Income in the year of payment. ​

Franco is owner and operator of a cleaning service who uses the accrual method of accounting. He receives the following payments on December 31, 2017, the last business day of his tax year: ? $\$ 5,000$ - Checks received from customers for services rendered during November and December 2018. The checks are deposited in his bank account on January 4, 2019. $\$ 4,000$ - Checks received from customers for services to be rendered during 2019 . The checks are received in the morning mail and deposited in his bank account on December 31, 2018. $\$ 2,400$ - A check received from a customer for a service contract. The services under the contract are to be rendered in 2019. The customer met Franco at the New Year's Eve party and gives Franco the check at 11:30 p.m. The check is deposited in his bank account on January 4, 2019. How much of the $11,400 collected by Franco on December 31 must be included in his 2018 gross income?

Chip, a single individual has two sales of stock during the current year. The first sale produces a short-term loss of $10,000 and the second sale results in a long-term gain of $40,000. Chip's taxable income without considering the gain is $150,000. Chip's stock transactions will increase his income tax liability by:

Ronald, a single taxpayer, purchased 300 shares of Jasmine Inc., stock on October 14, 2015, for $4,000. He sells the stock on August 22, 2018, for $2,000. Ronald has no other capital asset transactions in 2018. I.If Ronald's taxable income without considering the stock sale is $113,000, the sale of the stock will decrease his income tax liability by $480. II.If Ronald's taxable income without considering the stock sale is $13,000, the sale of the stock will decrease his income tax liability by $240. ​

Match each statement with the correct term below. -Unearned income

Glenn and Vera divorce during 2018. Per their 2018 divorce agreement, Glenn receives their former personal residence valued at $180,000 with a basis of $100,000. Also, Glenn will pay Vera $5,000 annually for eight years. If Vera dies before the end of the eight years, the balance of the payments is to be paid to Vera's estate in a lump sum. The couple has not lived together for the past two years.

Which of the following statements concerning prizes and awards is/are correct? I.Most all prizes and awards are exempt from taxation. II.Employee awards of tangible, personal property for length of service are at least partially excludable. III.Any prize or award received can be excluded if it is given to a governmental or charitable organization. IV.Employee awards for safety achievements are always excluded from income. ​

Ramsey Corporation allows an employee, Corrine, to use a company car for her vacation to San Diego. I.Corrine will not need to recognize the value of the use of the car since it was not cash. II.A "cash equivalent approach" is used to measure the amount of income that must be recognized by Corrine. III.The employer/employee relationship indicates that the receipt of the use of the car is a type of compensation for services rendered. IV.Income recognition is not necessary in this case. ​

Connie was walking her dog when she came across a paper bag with $20,000 in it. She turned the money into the police. After the appropriate period of time, no one claimed the money and the police returned the money to Connie. Connie does not have to recognize any taxable income since it was not derived from capital or labor.

Chicago Cleaning Services provides nightly janitorial services at a monthly rate of $300. Customers have three payment options: If Chicago Cleaning is a cash basis taxpayer: $\begin{array}{lr}\text { Month-by-month payments } & \$ 300 \\\text { One year advance payment } & 3,360(\$ 280 \text { per month }) \\\text { Two year advance payment } & 6,480(\$ 270 \text { per month }) \end{array}$ I.All cash payments are taxable when they are received. II.One-year advance payments may be deferred: $280 would be included in income for each month of service provided. ?

Brandon is the operator and owner of a cleaning service who uses the cash method of accounting. He receives the following payments on December 31, 2018, the last business day of his tax year: ? $\$ 3,000$ - Checks received from customers for services rendered during November and December 2018. The checks are deposited in his bank account on January 4, 2019. $\$ 4,000$ - Checks received from customers for services to be rendered during 2019 . The checks are received in the morning mail and deposited in his bank account on December 31, 2018. $\$ 2,400$ - A check received from a customer for a service contract. The services under the contract are to be rendered over 24 months, beginning in January 2019. The customer met Brandon at a New Year's Eve party and gives Brandon the check at 11:30 p.m. The check is deposited in his bank account on January 4, 2019. How much of the $9,400 collected by Brandon on December 31 must be included in his 2018 gross income?

Barrett is a real estate broker. He actively advertises his own and his clients' real estate for sale. He had the following transactions for one segment of his business: ? $\begin{array} { l l } 1 / 15 / 08 & \text { Purchased property } A \text { for } \$ 50,000 \\2 / 15 / 12 & \text { Paid } \$ 10,000 \text { to put up fencing on property A } \\6 / 20 / 12 & \text { Purchased property C for } \$ 18,000 \\1 / 15 / 18 & \text { Sold property C for } \$ 23,000 \\7 / 30 / 18 & \text { Sold property A for } \$ 95,000\end{array}$ How should Barrett account for the sales in 2018?

On December 24 of the current year, Louise is given a certificate by her employer entitling her to $1,500 worth of lodging at a Vail Village resort. The certificate states that it represents a "thank you" for graciously taking care of some client problems that were beyond the scope of normal business activities. The certificate is nontransferable. How much gross income must Louise recognize in the current year due to the certificate? Explain.

Rachael purchased 300 shares of Smelt, Inc. stock for $25 per share. At the end of the year, the stock price has risen to $30 per share. Rachael does not recognize taxable income even though there has been a $1,500 increase in wealth.

Carlotta finds a chest inscribed "Sinbad" that contains $250,000 of cash while diving among the coral reefs off the Virgin Islands. The US Customs and the DEA deny knowledge of the cash, so Carlotta keeps it. I.Carlotta would not recognize any gross income if the chest contained jewels valued at $250,000, rather than the cash. II.Recognition is necessary because Carlotta has an increase in wealth. III.Recognition will not occur because the windfall would not be considered as derived from capital or from labor. IV.The All-inclusive Income Concept explains the recognition of the cash as income. ​

Friendly Finance loans Anne $10,000 and she will pay $13,130 at the end of three years. Since Friendly is on a cash basis, it will recognize the $3,130 interest income when the loan is repaid.

Dahlia rents a condo owned by Bonnie. Both individuals are cash basis taxpayers. Dahlia uses the condo as her personal residence. Dahlia pays Bonnie $1,000 monthly, and pays $1,200 on October 1^st and April 1^st of each year as part of the lease agreement. The $1,200 payments are made directly to the county treasurer for real estate property taxes. What is the income tax treatment of these events? I.Bonnie can deduct the $1,200 payments for adjusted gross income as a property tax. II.Bonnie includes the $1,000 monthly receipts in her gross income. III.Bonnie must include the $1,200 payments in her gross income. IV.Dahlia can deduct the $1,000 monthly payments from her adjusted gross income. ​

Ralph and Renee are negotiating a divorce settlement that will be finalized in 2018. Renee has an option of taking a property settlement of $100,000 or alimony payments of $12,000 per year for 10 years. Without considering the time value of money, which of the following statements is true? I.If Renee expects that she will be in the 32% marginal tax bracket, she should take the property settlement of $100,000. II.If Renee expects that she will be in the 32% marginal tax bracket, she should take the alimony of $12,000 per year for 10 years. ​