1 With respect to the prepaid income from services, which one ofthe following is true?

a. The treatment of prepaid income is the same for tax andfinancial accounting.

b. A cash basis taxpayer can spread the income over the periodservices are to be provided if all of the services will becompleted by the end of the tax year following the year ofreceipt.

c. An accrual basis taxpayer can defer the portion of theadvance payment that relates to services not to be provided in thecurrent tax year to the next tax year (the tax year after the yearof receipt of the advance payment).

d. An accrual basis taxpayer can spread the income over theperiod services are to be provided regardless of the length of thatperiod.

2. Teal Company is an accrual basis taxpayer. On December 1,2016, a customer paid for a particular item that was on hand, butthe customer wanted the item delivered in early January. Tealdelivered the item on January 4, 2017.

a. Teal must recognize the income in 2016.

b. Teal may recognize the income in 2017 if Teal also does sofor financial reporting purposes.

c. Teal can elect to recognize the income in either 2016 or2017.

d. Teal must recognize 1/12th of the sale price as income in2016 and the remainder in 2017.

3. On January 5, 2016, Jane purchased a corporate bond payinginterest at 8% for $30,000. On September 1, 2016, she gave the bondto Tim. The bond pays $2,400 interest on December 31st. Jane andTim are cash basis taxpayers. When Tim collects the interest inDecember 2016:

a. Jane must include all of the interest in her grossincome.

b. Tim must include all of the interest in his gross income.

c. Jane must report $1,600 interest income in 2016, and Tim mustreport $800 interest income in 2016.

d. Jane must report $800 and Tim must report $1,600 interestincome in 2016.

4. Hubert contracted with Silver Company, Hubert’s controlledC-corporation. Hubert was a medical doctor and the contractprovided that he would work exclusively for the corporation. Noother doctor worked for the corporation. The corporation contractedto perform an operation for Paula for $1,800. The corporation paidHubert $1,200 to perform the operation under the terms of hisemployment contract.

a. Hubert must recognize $1,800 gross income on his personal taxreturn.

b. Hubert must recognize $600 taxable income on his personal taxreturn.

c. Hubert’s gross income is $1,200.

d. Hubert recognizes no gross income related to theseevents.

5. Daryl, a cash basis taxpayer, gave 1,000 shares of CopperCompany common stock to his daughter on September 29, 2016. CopperCompany is a publicly held company that has declared a $1.00 pershare dividend on September 30th every year for the last 20 years.Just as Daryl had expected, Copper Company declared a $1.00 pershare dividend on September 30, 2016, payable on October 15th, tostockholders of record as of October 10th. The daughter receivedthe $1,000 dividend on October 18, 2016.

a. Daryl must recognize the $1,000 dividend as his incomebecause he knew the dividend would be paid when he gifted thestock.

b. Daryl must recognize $750 of the dividend because he ownedthe stock for three- fourths of the year.

c. Daryl must recognize the $1,000 dividend because he stillconstructively owns the stock.

d. Daryl will recognize none of the $1,000 dividend.

Answer rating: 100% (QA)

ANSWER 1 a The treatment of prepaid income is the same for tax andfinancial accounting Prepaid income is considered a liability since the seller has not yet delivered and so it appears on the balance ... View the full answer