South-Western Federal Taxation 2017 Comprehensive 40th Edition -Test bank

1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   $1,000 of tax-exempt income is equivalent to $1,538 [($1,000)/(1 – .35)] of income that is subject to taxation. Income before tax of $1,538 yields $1,000 [$1,538 × (1 – .35)] of after-tax income.

POINTS:   1

DIFFICULTY:   Moderate

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-01 – LO: 5-01
CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Comprehension

OTHER:   Time: 5 min.

2. John told his nephew, Steve, “if you maintain my house when I cannot, I will leave the house to you when I die.” Steve maintained the house and when John died Steve inherited the house. The value of the residence can be excluded from Steve’s gross income as an inheritance.

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   The house was received as a payment for services, rather than as a bequest.

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Comprehension

OTHER:   Time: 5 min.

3. Brooke works part-time as a waitress in a restaurant. For groups of 7 or more customers, the customer is charged 15% of the bill for Brooke’s services. For parties of less than 7, the tips are voluntary. Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers. Using the customary 15% rate, her voluntary tips would have been only $6,000. Brooke must include $18,000 ($11,000 + $7,000) in gross income.

  a.  True

  b.  False

ANSWER:   True

RATIONALE:   The tips are compensation for income tax purposes because they are received for her services, rather than as a result of the customer’s “detached, disinterested generosity” (i.e., not a gift). She must include $18,000 ($11,000 + $7,000) in her gross income.

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Application

OTHER:   Time: 5 min.

4. Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife’s employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mel’s Federal gross income from the above is $2,500.

  a.  True

  b.  False

ANSWER:   True

RATIONALE:   The $2,500 interest on United States Government bonds must be included in gross income. The life insurance proceeds of $45,000 are excluded from gross income.

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Application

OTHER:   Time: 5 min.

5. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income.

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   The interest income of $3,000 is included in gross income because it represents interest income. The life insurance proceeds of $50,000 are excludible from gross income under § 101(a).

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Application

OTHER:   Time: 5 min.

6. Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Ed’s gross income. Ed’s wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

  a.  True

  b.  False

ANSWER:   True

RATIONALE:   The $6,000 accrued salary Ed had earned must be included in his wife’s gross income. The life insurance proceeds of $40,000 are excluded under § 101(a).

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Application

OTHER:   Time: 5 min.

7. Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife’s medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 – $12,000) in gross income.

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   The exclusion for terminal illness applies to policies on the terminally ill insured person. Gary did not have the terminal illness.

POINTS:   1

DIFFICULTY:   Easy

LEARNING OBJECTIVES:   CMPV.SWFT.LO: 5-02 – LO: 5-02

NATIONAL STANDARDS:   United States – BUSPORG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:   Bloom’s: Application

OTHER:   Time: 5 min.