Accounting Income Tax. (29 Questions)
romnhaChapter 3
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PROBLEMS
I: 3-34
Noncash Compensation.
For each of the following items indicate, whether the individual taxpayer must include any amount in gross income.
a. Employees of Eastside Bookstore are given their birthdays off with pay.
b. Westside Hardware, Inc. gave each employee 10 shares of Westside stock worth $100 per share in lieu of a cash bonus.
c. Employees of Northside Manufacturing were allowed to take home the company’s old computers when the company purchased new ones.
I: 3-35
Constructive Receipt.
Which of the following constitutes constructive receipt in the current year ended December 31?
a. A salary check received at 6:00 p.m. on December 31, after all the banks have closed.
b. A rent check received on December 30 by the manager of an apartment complex. The manager normally collects the rent for the owner. The owner was out of town.
c. A paycheck received on December 29 that was not honored by the bank because the employer’s account did not have sufficient funds.
d. A check received on December 30. The check was postdated January 2 of the following year.
e. A check received on January 2. The check had been mailed on December 30.
I: 3-39
Constructive Dividend.
Brad owns a successful corporation that has substantial earnings and profits. During the year, the following payments were made by the corporation:
a. Salary of $250,000 to Brad. Officers in other corporations performing similar services receive between $50,000 and $85,000. Unlikely
b. Rent of $25,000 to Brad. The rent is paid in connection with an office building owned by Brad and used by the corporation. Similar buildings rent for about the same amount. Unlikely
c. Salary of $5,000 to Brad’s daughter, who worked for the company full-time during the summer and part-time during the rest of the year while she attended high school. Unlikely
d. Alimony of $40,000 to Brad’s former wife. Although Brad was personally obligated to make the payments, he used corporation funds to make the payments. Discuss the likelihood of these payments being treated as constructive dividends. If a payment is deemed to be a constructive dividend, indicate how such a payment will be treated.
Likely; employees who are also shareholders may borrow money from the company to buy personal items. This loan may be classified by the IRS as a constructive dividend and must be reported on the tax return of the shareholder. In addition, the company would not be able to take a deduction for the constructive dividend
I: 3-41
Prepaid Rent.
Stan rented an office building to Clay for $3,000 per month. On December 29, 2008, Stan received a deposit of $4,000 in addition to the first and last month’s rent. Occupancy began on January 2, 2009. On July 15, 2009, Clay closed his business and filed for bankruptcy. Stan had collected rent for February, March, and April on the first of each month. Stan had received May rent on May 10, but collected no payments afterwards. Stan withheld $800 from the deposit because of damage to the property and $1,500 for unpaid rent. He refunded the balance of the deposit to Clay. What amount would Stan report as gross income for 2008? for 2009?
I: 3-42
Rental Income.
Ed owns Oak Knoll Apartments. During the year, Fred, a tenant, moved to another state. Fred paid Ed $1,000 to cancel the two-year lease he had signed. Ed subsequently rented the unit to Wayne. Wayne paid the first and last month’s rents of $800 each and a security deposit of $500. Ed also owns a building that is used as a health club. The club has signed a fifteen-year lease at an annual rental of $17,000. The owner of the club requested that Ed install a swimming pool on the property. Ed declined to do so. The owner of the club finally constructed the pool himself at a cost of $15,000. What amount must Ed include in gross income?
Ed must include the 34,600.00 for the year.
I: 3-43
Gross Income.
Susan’s salary is $44,000 and she received dividends of $600. She received a statement from SJ partnership indicating that her share of the partnership’s income was $4,000. The partnership distributed $1,000 to her during the year and $600 after year end. She won $2,000 in the state lottery and spent $50 on lottery tickets. Which amounts are taxable?
I: 3-44
Interest Income.
Holly inherited $10,000 of City of Atlanta bonds in February. In March, she received interest of $500, and in April she sold the bonds at a $200 gain. Holly redeemed Series EE U.S. savings bonds that she had purchased several years ago. The accumulated interest totaled $800. Holly received $300 of interest on bonds issued by the City of Quebec, Canada. What amount, if any, of gross income must Holly report?