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Chapter 4 Discussion Questions
A Series EE U.S. government savings bond accrues 3.5% interest each year. The bond matures in three years, at which time the principal; and interest will be paid. The bank will pay the taxpayer at a 3.5% interest rate each year if he agrees to leave money on deposit for three years. What tax advantage does the Series EE bond offer that is not available with the bank deposit?
The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of accounting rather than the accrual method?
Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows that he can sell the car for $13,000, but he is very wealthy and does not need the money. On the other hand, his daughter, who has very little income, needs money to make the down payment on a house.
- Would it matter, after taxes, whether Wade sells the car and gives the money to his daughter or whether he gives the car to his daughter and she sells it for $13,000? Explain.
- Assume that Wade gave the car to his daughter after he had arranged for another person to buy it from his daughter. The daughter than transferred the car to the buyer and received $13,000. Who is taxed on the gain?
On January 1, 2015, Kunto, a cash basis taxpayer, pays $46,228 for a 24 month certificate. The certificate is priced to yield 4% (the effective interest rate) with interest compounded annually. No interest is paid until maturity, when Kunto receives $50,000. In your computations:
- Compute Kunto’s gross income from the certificate for 2015.
- Compute Kunto’s gross income from the certificate for 2016.
Round any amounts to the nearest dollar.
Chapter 4 Problem
Determine the taxpayer’s current-year (1) economic income and (2) gross income for tax purposes from the following events:
- Sam’s employment contract as chief executive of a large corporation was terminated, and he was paid $500,000 not to work for a competitor of the corporation for five years.
- Elliot, a 6-year-old child, was paid $5,000 for appearing in a television commercial. His parents put the funds in a savings account for the child’s education.
- Valery found a suitcase that contained $100,000. She could not determine who the owner was.
- Winn purchased a lottery ticket for $5 and won $750,000.
- Larry spent $1,000 to raise vegetables that he and his family consumed. The cost of the vegetables in a store would have been $2,400.
- Dawn purchased an automobile for $1,500 that was worth $3,500. The seller was in desperate need of cash.
Chapter 5 Discussion Question
Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000. As a result, how much gross income does Jason report?
Alfred owned a term life insurance policy at the time he was diagnosed with a terminal illness. After paying $18,300 in premiums, he sold the policy to a company that is authorized by the state of South Carolina to purchase such policies. The company paid Alfred $125.000. When Alfred died 18 months later the company collected the face amount of the policy, $150,000.
As a result of the sale of the policy, how much is Alfred required to include in his gross income?
Leland pay premiums of $5,000 for an insurance policy in the face amount of $25,000 upon the life of Caleb and subsequently transfers the policy to Tyler for $7,500. Over the years, Tyler pays subsequent premiums of $1,500 on the policy. Upon Caleb’s death, Tyler receives the proceeds of $25,000. As a result, what amount is Tyler required to include in his gross income?
Jarrod receives a scholarship of $18,500 from Riggers University to be used to pursue a bachelor’s degree. He spends $12,000 on tuition, $1,500 on books and supplies, $4,000 for room and board, and $1,000 for personal expenses. How much may Jarrod exclude from his gross income?