1. On May 1, 20x1, an insurance company sells a three-year insurance policy to one of its customers. The cost of the premiums is $1,200. The insurance company uses the accrual basis and a calendar year.

a. What amount of the $1,200 must the company include in its gross income over the term of the policy (20x1 – 20x4)?

b. Would your answer change if the company used the cash basis? Explain.

2. Compensation. (Obj. 1) Mark Wellaby, M.D., practices medicine. During the year he received the following items in payment for his services: cash of $48,000; farm produce worth $1,000; common stock with a total par value of $500; and a $485, 90-day noninterest-bearing note dated December 1. The stock at the time of receipt had a fair market value of

$1,000. At December 31, the fair market value of the stock had dropped to $900. Compute Dr. Wellaby’s gross income.

3. Tips. (Obj. 1) The following questions involve tip income. Answer each question by inserting an “X” in the proper column.

4. Tips. (Obj. 1) Marge Connor is a hostess at a local diner. As a hostess, Conner normally does not receive tips. However, on occasion she will help out with an order and the waitress will give Connor part of her tips. During the current year, Conner’s total tips were $200.

a. Discuss the tax consequences of the tip income if Conner did not receive more than $20 in tips in any one month during the year.

b. How would your answer to Part a. differ if she received more than $20 in tips during the month of May?

5. Property Settlements, Alimony, and Child Support. (Obj. 1) Distinguish between the three types of payments former spouses may make to one another and discuss the tax treatment to both the paying spouse and the recipient spouse of each type of payment.

6. Alimony. (Obj. 1) For a divorce or legal separation after 1984, alimony payments are deductible by the payer and includable in the payee’s gross income. However, to be considered alimony, the payments must meet six conditions. What are these conditions?

7. Alimony and Child Support. (Obj. 1) Under the terms of their divorce, Henry is to pay Winona $1,000 a month. The terms of the agreement specify that $550 of each payment is to be for child support.

a. If Henry makes all of his required payments during the current year, how much must Winona include in gross income? What amount can Henry deduct?

b. How, if at all, would your answer to Part a. change if the agreement were silent as to how much of each payment constituted child support?

c. How, if at all, would your answer to Part a. change if Henry only makes 8 of the 12 required

payments during the year?

8. Property Settlements, Alimony, and Child Support. (Obj. 1) Under the terms of a divorce agreement, Gary is to pay $200 per month as child support to Judy who has custody of their 12-year-old child. Judy is also to receive $1,200 per month for 12 years, but this payment will change to $1,000 per month when the child reaches age 18. Gary is also to transfer stock to Judy. The stock cost $20,000 and has a market value of $50,000. The divorce is finalized on May 1. In the first year under the agreement, Judy receives the stock and 8 months of cash payments.

a. How do these transfers affect Judy’s gross income and Gary’s AGI?

b. How, if at all, would your answer to Part a. change if during the first year Gary only made 6 of the 8 required cash payments?

9. Over the year, Jen made nondeductible contributions to her traditional IRA. At the beginning of the year, she had yet to withdraw $56,420 of her nondeductible contributions. At the end of the year, the value of the asset in the IRA was $225,850. During the year, Jen withdrew $42,000 from the account.

a. Describe the tax consequences to Jen assuming Jen is 61-year-old at the time of the distribution.

b. Same as in part a., except that Jen is 56-year-old, and does not meet one of the penalty free exceptions for making early withdrawals from her IRA.

10. On August 10, 2015 Don turned 65 and received his first pension payment. Over the year, he had contributed $68,900 to his employers qualified retirement plan. Taxes were paid of $24,700 of his amount. The remaining 44,200 was contributed after the law was changed to permit pre-tax contribution to the plan. Don is to receive monthly benefit of $425 on the same day every month for the remainder of this life.

a. For the five-month payment Don receives in 2015, what amount is included in gross income?

b. If Don receives 12 payments in 2016, what amount does he include in gross income?

c. If Don lives longer than his expected 260 payments, how much each month $425 payment will be included in his Gross Income?

d. How would your answer to part a, -c. change if Don were married and his pension benefit were to continue for both his and his wife’s lives? Don’s wife is 61 as on August 10, 2015.

11. Annuity Income. Gregg purchased an annuity contract for $92,400. The contract stated that he would receive $550 a month for life, starting on January 1, 2010. On that date, Gregg’s remaining life expectancy was 20 years. For 2015, how much of the $6,600 of annuity payments can Gregg exclude from gross income.

Answer rating: 100% (QA)

1 a When company is going to paid premium on accrual basis than company must include 15 of premium to its gross income When the amount is less than 1500 than the included income must be from 5 to 15 b ... View the full answer