ACCT EXAM 1

Monterey Developers purchases 10 acres of land for $15,000 on January 14, 2020. It also pays $2,000 in legal and other fees related to the purchase. Monterey spends $3,000 for legal fees, permit licenses, and city franchise fees to subdivide the land into 10 one-acre plots. Sewer and utility line easements cost an additional $5,000. Interest paid on the loan that financed the purchase is $1,200 for 2020. Monterey also pays $800 in property taxes in 2020. What is Monterey's adjusted basis in the land at the end of 2020?

$25,000

During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has a taxable income of $200,000 and pays dividends of $50,000. Corporation Z is an S corporation that has a qualified business income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter:

.Only statement I is correct.

Conzo is injured in an accident while working at his job. He received $1,500 in worker's compensation benefits for 5 weeks of lost work. How much should Conzo report as gross income from the receipt of these benefits?

0

Fran dies this year. Her spouse, Carl, is the beneficiary of a $100,000 life insurance policy. Carl elects to receive the proceeds in 10 equal installments of $11,000. In the current year, Carl receives $11,000. The amount included in Carl's current year gross income is:

1,000

Samuel slips on an icy spot in front of an apartment and is hospitalized for three weeks. The owner of the apartment pays Samuel $14,000 for medical expenses and gives him $4,000 for his pain and suffering. Samuel receives his regular $1,800 salary from his employer while he couldn't work and also receives $7,000 in disability pay from a plan that he had purchased. Samuel's gross income from these payments is:

1,800

Southview Construction Company enters into a contract to build a 30-mile cross country ski trail for $36,000 in the current year. Southview estimates the cost of building the trail to be $12,000. During the first year, Southview completes 10 miles of trail at a cost of $5,000. Southview receives $13,000 in advanced payments on the contract price in the first year. How much gross income must Southview recognize from the construction project in the first year?

15,000

Gary receives $40,000 worth of Quantro, Inc., common stock from the estate of his late grandmother. Six months later, he receives a $100 cash dividend. Before the end of the year, Gary sells the stock for $42,000. Because of these events, how much must Gary include in his gross income for the year?

2,100

John purchases State of Oklahoma general-purpose bonds at a cost of $3,400 in 2018. He receives $210 interest on the bonds in 2018 2019, and 2020. In 2020, he sells the bonds for $3,800. How much income does John recognize in each of the following years?

2018 2019 2020 -0- -0- 400

Moonglow, Inc., purchases a group term life insurance plan for all its employees. Harold receives $250,000 of insurance for the current year at a cost to the company of $2,500. The IRS Table of Premium Values indicates that premiums are $1.08 annually per $1,000 of protection. How much gross income does Harold have from the purchase of the life insurance by Moonglow, Inc.?

216

Terry is a worker in a country named Pretoria. His salary is $46,000, and his taxable income is $52,000. Pretoria imposes a worker tax as follows:Employers withhold a tax of 20% of all wages and salaries. If taxable income as reported on the employee's income tax return is greater than $50,000, an additional 10% tax is withheld on all income. Terry's marginal tax rate is:

30 percent

Anna's grandfather gave her stock worth $100,000 on her 18th birthday. During the current year, Anna receives $5,000 of dividends on the stock, which she uses to pay college expenses. The cost of Anna's tuition, fees, and books is $4,000. Anna's income from this event is:

5,000

Chipper borrowed money from several creditors for personal uses. At a time when his assets are worth $120,000 and his debts are $140,000, his creditors agree on a compromise settlement in which they forgive $26,000 of the debt. How much of the $26,000 is included in Chipper's gross income?

6000

Donna owns a cleaning service. Reed, a customer, receives Donna's bill of $65 for October 2020 services on October 31, 2020. Reed pays the $65 on January 4, 2021. I.If Donna is a cash basis taxpayer, she recognizes the income in 2021. II.If Donna is an accrual basis taxpayer, she will recognize the $65 in 2020.III.Donna will recognize the $65 in 2020 regardless of the accounting method, because that is when she earned the income.

Statements I and II are correct.

Sally is a single individual. In 2020, she receives $20,000 of tax-exempt income in addition to her salary and other investment income of $100,000. Sally's 2020 tax return showed the following information: Gross income$100,000Deductions for adjusted gross income( 4,000)Adjusted gross income$96,000Itemized deductions(16,000)Taxable income$80,000Total tax$13,390Less: Income tax withheld from wages(13,590)Refund$200 Which of the following statements concerning Sally's tax rates is (are) correct? I.Sally's average tax rate is 16.7%. II.Sally's average tax rate is 13.4% .III.Sally's marginal tax rate is 22%. IV.Sally's marginal tax rate is 24%.

Statements I and III are correct

Christy's 2019 tax return was audited during November 2020 The auditor proposed an additional tax due of $1,500. Christy disagreed. What should Christy do next? I.Within 30 days, she must file a protest. II.She must respond with a written protest letter .III.She may respond with an oral protest.

Statements I and III are correct.

Which of the following are included among Adam Smith's criteria for evaluating a tax? I.Convenience II.Fairness III.Neutrality IV.Economy

Statements I and IV are correct.

Income realization may occur as a result of: I.relief from a liability .II.exchange of property. III.payment of the taxpayer's indebtedness by another .IV.a barter transaction where only goods and services are exchanged.

Statements I, II, III, and IV are correct.

Items that are excluded from gross income include all of the following except:

U.S. Treasury bills interest.

Glenn and Vera were divorced in 2019. Per their 2019 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 8 years. If Vera dies before the end of the 8 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 2 years.

Vera does not recognize any income from the property and/or cash transactions.

Mei-Ling is a candidate for a master's degree in taxation from Western State University. During the current year, she receives the following cash payments: State allocated tuition waiver scholarship$2,200A Microsoft scholarship (for fees and books)800Check from her grandmother1,700Loan proceeds from the college financial aid office2,500Prize won from a "rub and scratch" lottery ticket300Loan from her roommate100Interest received from National Bank CD400 How much must be included in Mei-Ling's gross income?

700

True or False? The holding period for receiving long-term capital gain treatment is more than 12 months.

True

Anna receives a salary of $42,000 during the current year. She sells some land that she held as an investment at a loss of $7,000 and some stock at a gain of $11,000. Anna's adjusted gross income is:

$46,000.

Nora receives a salary of $55,000 during the current year. She sells some land that she held as an investment at a loss of $15,000 and some stock at a gain of $10,000. Nora's adjusted gross income is:

$52,000.

Based on the following information, what is the 2020 taxable income for a married couple with two children? Total income$120,000 Excludable income2,000 Deductions for AGI5,000 Allowable itemized deductions8,000

$88,200

True or False?

According to the U.S. Supreme Court, income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through sale or conversion of capital assets.

Art has worked for Denver's Diamond Dealers (DDD) for 10 years. During the current year, Art marries and moves from his downtown apartment to a house in the suburbs. Before he was married, Art always rode the bus to work. Because there is no bus service to his new home, Art needs to purchase a car. Wayne, the owner of DDD, gives Art $17,000 to purchase a used car. Which of the following statements concerning the $17,000 payment is/are correct? I.If DDD does not require Art to repay the $17,000, Art has $17,000 of compensation income. II.If DDD requires Art to repay the $17,000, Art has no compensation income from the receipt of $17,000.

Both statements are correct

Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath Corporation has a taxable income of $80,000 and pays dividends of $30,000. Which of the following statements about Jennifer's income from Heath Corporation is/are correct?

Both statements are correct

Alice is a plumber and collector of rare stamps. Instead of always receiving cash payments for her work, she occasionally has her customers send their payments to a stamp broker. The broker then makes stamp purchases on Alice's behalf and mails the stamps to her. Alice never reports the value of the stamps received as income on her tax return. I.Alice's actions is a form of tax evasion .II.Alice's action is subject to payment of tax, interest, and penalty if detected by the IRS.

Both statements are correct.

Darnel owns 10% of the stock in Allison Company. During the current year, Allison has an operating income of $200,000 and distributes $80,000 to its owners. I.If Allison is a corporation, Darnel has $8,000 of income from Allison. II.If Allison is a partnership, Darnel has $20,000 of income from Allison.

Both statements are correct.

Which of the following is a taxable entity?

C corporation

In the current year, Darlene purchases a 20% interest in Grant Partnership (GP) for $10,000. During the current year, GP has a taxable income of $80,000 and Darlene withdraws $5,000 of cash from the partnership. Darlene's income to be reported from her investment in GP and her basis in GP at the end of the year is:

Income Basis $16,000 $21,000

If a taxpayer has a choice of receiving income in the current year versus the following year, which of the following tax rates is important in determining the year in which he should include the income?

Marginal

Ronald is a consultant for Economic Forecasters, Inc. To minimize his tax liability, he enters into a legal contract to transfer 25% of the fees from a new consulting contract to his son Ken, who is 42 and owns a pest control business. Which of the following statements about the transaction is correct? I.The assignment-of-income doctrine does not apply if Ken and Ronald are in the same marginal tax bracket. II.The assignment-of-income doctrine does not apply if Ken's age is under 14.

None of these statements are correct.

Rex is a programmer with Monon Electronics Corporation. His annual salary is $50,000. As part of his compensation package, he receives a term life insurance policy equal to his annual salary. The term life insurance is provided by the employer on a nondiscriminatory basis to all members of the programming staff. Members of the sales staff have a cafeteria plan from which to select various benefits including life and health insurance coverage. I.Rex has an excludable amount of income because of the nature of his employment benefit. II.Rex must include $50,000 in his gross income because that is the value of the insurance benefit. III.Rex must include the cost of the insurance policy in his gross income. IV.If the benefit is only available to "key" employees and Rex is a "key" employee, he may exclude the cost of the premiums paid from his gross income.

Only statement I is correct.

Samuel owns some land, which has an oil deposit underneath it. His annual royalties vary from $50,000 to $60,000. Because Samuel is in the highest marginal tax rate bracket, he would like to have some of the royalty income taxed to his son, Jack, thus lowering the overall tax on the royalty income. To do this: I.Samuel can gift part of the land to Jack. II.Samuel can gift part of each year's royalties to Jack.

Only statement I is correct.

Roseanne sells her personal automobile for $1,000 in the current tax year. She purchased the car for $12,000 nine years ago. What are the tax effects of the sale in the current tax year? I.Roseanne recognizes a deductible loss of $11,000 in her current-year tax return because of the capital recovery concept. II.Roseanne recognizes no loss on her tax return because of lack of business purpose with the automobile.

Only statement II is correct

Sarah owes a deductible expense that she can either pay (and deduct) this year or next year. She is in the 22% marginal tax rate bracket. Which of the following statements about this payment is/are correct based on marginal tax rate considerations? I.Deductions should always be taken in the current year. Sarah should pay the expense this year. II.If Sarah expects to be in the 32% marginal tax rate bracket next year, she should pay the expense next year.

Only statement II is correct.

True or False? According to the U.S. Supreme Court, income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through sale or conversion of capital assets.

True

The mythical country of Januvia imposes a tax based on the number of titanium coins each taxpayer owns at the end of each year per the following schedule: Number of titanium coinsTax0 - 200$500 + $5 per titanium coin201 - 500$1,000 + $6 per titanium coin> 500$4,000 + $7 per titanium coin Marvin, a resident of Januvia, owns 300 titanium coins at the end of the current year. I.Marvin's titanium coins tax is $2,800. II.Marvin's marginal tax rate is $6. III.Marvin's average tax rate is $9.33. IV.Marvin's average tax rate is $6.

Statements I, II, and III are correct.

Returns of human capital I.are excluded from gross income. II.include unemployment compensation benefits. III.include workers' compensation payments received for personal injury. IV.are treated the same for tax purposes as all other forms of capital recovery.

Statements I, III, and IV are correct.

Indicate which of the following statements concerning the following tax rate structures is/are correct. When Income EqualsTotal Tax EqualsStructure #110,000600100,0005,000Structure #215,00090075,0004,500Structure #313,00097586,0006,600 I.Tax Structure #1 is proportional. II.Tax Structure #1 is regressive. III.Tax Structure #2 is progressive. IV.Tax Structure #3 is progressive.

Statements II and IV are correct.

Roberto is a furniture salesman for Gerald's Furniture Mart. Roberto purchases a bedroom suite from Gerald's for $8,000. The sticker price is $11,000. Gerald's policy is to discount all customer purchases for up to $1,000 on the sticker price for purchases over $10,000. What is the tax treatment of Roberto's furniture purchase? I.Roberto must include $3,000 in his gross income .II.Gerald's Furniture Mart can deduct $2,000 as compensation expense in addition to properly accounting for the sale of the furniture .III.Roberto does not need to account for the furniture purchase since it is for his personal use.I V.Roberto has imputed income because of the nature of the furniture purchase.

Statements II and IV are correct.

According to the IRS definition, which of the following is not a characteristic of a tax?

The payment relates to the receipt of a specific benefit.

True or False? Julian is operating an illegal gambling operation. Even though the income is not legal, it is classified as earned

True

In what circumstances would some portion of the Social Security benefits received by a single taxpayer be subject to taxation? Assume that all sources of income are listed.

The taxpayer receives $10,000 in Social Security benefits, qualified pension plan benefits of $13,000, and municipal bond interest of $8,000.

True or False? A deferral is like an exclusion in that it does not have a current tax effect. However, it differs in that an exclusion is never subject to tax, whereas a deferral will be subject to tax at some point of time in the future

True

Carter sold 100 shares of Mitsui, Inc., for $8,000, but he only recognized $2,000 as income because the original purchase price was $6,000. This is because of the:

capital recovery concept.

No income is taxed until the taxpayer is allowed the return of the original investment because of the:

capital recovery concept.

Hank bought a small ranch for $300,000 several years ago. In the current year, oil is discovered on a neighboring property. The county assessor re-valued Hank's property at $1,550,000. Hank does not recognize any income because of the:

realization concept.