Federal Taxation Homework Wk3

Federal Taxation Homework Wk3


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Chapter 4


  1. LO.2, 3 On December 29, 2014, an employee received a $5,000 check from her employer’s client. The check was payable to the employer.  The employee did not remit the funds to the employer until December 30, 2014.  The employer deposited the check on December 31, 2014, but the bank did not credit the employer’s bank account until January 2, 2015.  When is the cash basis employer required to include the $5,000 in gross income?


  1. LO.1, 2, 5 Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years.  The selected investment will be liquidated at the end of five years.  The alternatives are:
  2. A taxable corporate bond yielding 5% before tax and the interest can be reinvested at 5% before tax.
  3. A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).
  4. Land that will increase in value.

The gain on the land will be classified and taxed as a long-term capital gain.  The income from the bonds is taxed as ordinary income.  How much must the land increase in value to yield a greater after-tax return than either of the bonds?

Given:  Compound amount of $1 and compound value of annuity payments at the end of five years:

Interest Rate                            $1 compounded for 5 years                 $1 Annuity compounded                                                                                                                    for 5 years


5%                                                       $1.28                                                   $5.53

4%                                                       1.22                                                    5.42

3.6%                                                    1.19                                                    5.37


  1. LO.2, 3 Troy a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Tory is a full-time employee of the corporation and receives a salary of $60,000 per year.  He also receives a bonus equal to 10% of all collections from clients he serviced during the year.  Determine the tax consequences of the following events to the corporation and to Troy:
  2. On December 31, 2014, troy was visiting a customer.  The customer gave troy a $10,000 check payable to the corporation for appraisal services Troy preformed during 2014.  Troy did not deliver the check to the corporation until January 2015.
  3. The facts are the same as in (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporation’s account until January 2015.
  4. The facts are the same as is (a), except that the customer told Troy to hold the check until January 2015 when the customer could make a bank deposit that would cover the check.


  1. LO3, 4 Faye, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $270,000.  Changes in their capital accounts during the tax year were as follows:


  Faye Gary Heidi Total
Beginning Balance $50,000 $50,000 $50,000 $150,000
Withdrawals (20,000) (35,000) (10,000) (65,000)
Additional contributions 0 0 5,000 5,000
Allocation of profits 90,000 90,000 90,000 270,000
Ending balance $120,000 $105,000 $135,000 $360,000


In arriving at the $270,000 of partnership profits, the partnership deducted $2,400 ($800 for each partner) in premiums paid for group term life insurance on the partners.  Faye and Gary are 39 years old, and Heidi is 35 years old.  Other employees are also eligible for group term life insurance equal to their annual salary.  These premiums of $10,000 have been deducted in calculating the partnership profits of $270,000.  Compare each partner’s gross income from the partnership for the tax year.


  1. LO.4, 5 Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds @ 4% if his father will guarantee the debt. Roy’s father, Hal, owns a $150,000 CD currently yielding 3.5%.  The Federal rat is 3%.  Hal agrees to either of the following:

* Roy borrows from the bank with Hal’s guarantee to the bank

* Cash in the CD (with no penalty) and lend Roy the funds at 2% interest.

Hal is in the 33% marginal tax bracket.  Roy, whose only source of income is his salary, is in the 15% marginal tax bracket.  The interest Roy pays on the mortgage will be deductible by him.  Which option will maximize the family’s after-tax wealth?


Chapter 5


  1. LO.2, 5 Wilbur has been offered a job at a salary that would put him in the 25% marginal tax bracket. In addition to his salary, he would receive health insurance coverage. Another potential employer does not offer health insurance but has agreed to match the first offer on an after-tax and insurance basis.  The cost of health insurance comparable to that provided by the other potential employer is $9,000 per year.  How much more in salary must the second potential employer pay so that Wilbur’s financial status will be the same under both offers?


  1. LO.3 Dolly is a cash basis taxpayer. In 2014, she filed her 2013 South Carolina income tax return and received a $2,200 refund. Dolly took the standard deduction on her 2013 Federal income tax return, but will itemize her deductions in 2014. Molly, a cash basis taxpayer, also filed her 2013 South Carolina income tax return in 2014 and received a $600 refund.  Molly has $12,000 in itemized deductions on her 2013 Federal income tax return, but will take the standard deduction in 2014.  How does the tax benefit rule apply to Dolly’s and Molly’s situations?  Explain.


  1. LO.2 Adrian was awarded an academic scholarship to State University for the 2014-2015 academic year. He received $6,500 in August and $7,200 in December 2014. Adrian had enough personal savings to pay all expenses as they came due.  Adrian’s expenditures for the relevant period were as follows:


Tuition, August 2014                                      $3,700

Tuition, January 2015                                       3,750

Room and board

Aug-Dec 2014                                      2,800

Jan-May 2015                                       2,500

Books and educational supplies

Aug-Dec 2014                                      1,000

Jan-May 2015                                       1,200


Determine the effect on Adrian’s gross income for 2014 and 2015.


  1. LO.2, 5 Mauve Corporation has a group hospitalization insurance plan that has a $200 deductible amount for hospital visits and a $15 deductible for doctor visits and prescriptions. The deductible portion paid by employees who have children has become substantial for some employees. The company is considering adopting a medical reimbursement plan or a flexible benefits plan to cover the deductible amounts.  Either of these plans can be tailored to meet the needs of the employees.  What are the cost considerations to the employer that should be considered in choosing between these plans?


  1. LO.4, 5 Fran, who is in the 35% tax bracket, recently collected $100,000 on a life insurance police she carried on her father. She currently owes $120,000 on her personal residence and $120,000 on business property. National Bank holds the mortgage on both pieces of property and has agreed to accept $100,000 in complete satisfaction of either mortgage.  The interest rate on the mortgages is 8%, and both mortgages are payable over 10 years.  What would be the tax consequences of each of the following alternatives assuming that Fran currently deducts the mortgage interest on her tax return?
  2. Retire the mortgage on the residence.
  3. Retire the mortgage on the business property.


Which alternative should Fran select?