1 Testbank

Chapter 4
Gross Income

TRUE-FALSE QUESTIONS—CHAPTER 4

1. Dr. Yomo, a cash basis taxpayer, received a check for $250 after banking hours on
December 30, 2018, from a patient. Since Dr. Yomo could not deposit the check in his
business checking account until January 2, 2019, the fee of $250 is not included in his
income for 2018.

2. A scholarship received by a student that represents compensation for past, present, or

future services is includible in gross income.

3. Compensation for damages to a person's character or for personal injury or illness is

taxable.

4. Paul Penn, a cash basis taxpayer, received a desk in exchange for bookkeeping services.
He should report the fair market value of the desk as income.

5. On December 31, 2018, George Gaines' bank credited his savings account with interest
earned from October 1, 2018 through December 31, 2018. The bank posted this interest
to his passbook on January 15, 2019, when he made a withdrawal. George, a calendar
year cash method taxpayer, must report this interest on his 2018 income tax return.

6. If the tenant pays any expenses of the landlord, these payments are rental income to the
landlord and must be included in the landlord's return.

7. An amount called a security deposit which is to be used as a final payment of rent

should not be included in rental income in the year received, but should be included in
income in the year the lease expires.

8. Ms. Clara Crayola, a teacher, received a cash award of $5,000 from the Chamber of
Commerce in recognition of her past accomplishments in the field of education. She
was chosen without action on her part and is not expected to perform any future
services. The $5,000 award is the same as any other prize and must be reported by Clara
as income in 2018.

9. Dr. Nelly Newman recently graduated from medical school and has begun her
internship in a university hospital. Dr. Newman receives a $1,200 per month stipend, the
same as all other interns. The internship is a required part of Dr. Newman's training as it
is of all other medical school graduates entering her field of specialty. The $1,200 per
month stipend represents a nontaxable grant.

10. Rick Rambler is divorced from his wife, who has custody of their child. The divorce
decree provides that Rick must pay his former wife $15 per week toward the child's
support, which he did throughout the calendar year. The decree also provides that he

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2 CCH Federal Taxation—Basic Principles

may claim the child as his exemption. Rick's former wife can prove that during the year
she contributed $7,500 toward the support of the child. Rick is entitled to claim the
exemption for the child.

11. Dan Drew owned two shares of a corporation's common stock. He paid $60 for one
share and $30 for the other share. The corporation declared a stock dividend which gave
stockholders two new shares of common stock for each share they held. After the
distribution, Dan owns six shares of stock with an adjusted basis of $15 each.

12. When corporate bonds are sold between interest dates, the purchaser may take a
deduction for that part of the purchase price that represents accrued interest as a return
on capital from the next interest payment.

13. Jody Juniper owns five shares of stock in Treeside Corporation. The corporation
declared a five percent stock dividend. It also set up a plan wherein fractional shares
were sold and the cash proceeds were distributed to the stockholders. Jody should treat
the amount received for the fractional share stock dividend as an ordinary taxable
dividend.

14. Alan Anderson, a lessor, entered into a 10-year lease with a lessee in 2018. In addition
to the $5,000 received for the 2018 rent, Alan received $5,000 in advance rent for the
last year of the lease. Alan must include $10,000 in rental income in 2018.

15. Tim Thayer, a lessee of part of an office building from an unrelated lessor, made
permanent improvements which had a useful life longer than the remaining term of the
lease. The improvements are not recovery property. Tim may amortize the cost of the
improvement over the remaining term of the lease.

16. Advance rent must be included in rental income in the year received regardless of the
period covered or the accounting method used.

17. If both alimony and child support payments are required by the divorce decree or
agreement and less than the required amount is paid, the payments apply first to child
support and then to alimony.

18. Payments of a former wife's medical expenses under a divorce decree requiring that the
husband pay the wife's future medical expenses in addition to qualifying alimony are
deductible as alimony.

19. In 2018, Greta Grady received $50,000 in advance payments under a 50-month lease
agreement. The $50,000 represented the entire amount due under the lease. There were
no restrictions on the use or enjoyment of the payments. Greta must include the $50,000
as income in 2018.

20. The fair market value of property or services received in bartering must be included in
gross income.

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21. Zelda Zayer leased a room to Victor Vaughn for one year. He paid her $500 for
November's and December's rent and $100 as a security deposit to be returned to him at
the end of the lease. Zelda must include the $600 as income when received.

22. Greg Greystone rents an apartment to Brad Berry. If Brad pays any of Greg's expenses,
Greg must include the payments in his rental income. Greg may deduct the expenses
paid by Brad if they are otherwise deductible.

23. If the taxpayer owns Series E or Series EE bonds and chooses to report the increase in
redemption value as interest income each year, the taxpayer must continue to do so for
all discount bonds that are owned or obtained later.

24. When corporate bonds, which are not original discount bonds, are sold between interest
dates, the accrued interest to the date of the sale must be reported by the seller as taxable
interest income. When the purchaser receives the next payment, the total amount must
be reported as taxable interest income and the accrued interest shown as an adjustment
(or subtraction).

25. Jerome Judson's divorce decree calls for him to pay his former wife $200 a month as
child support and $200 a month as alimony. This year he paid only $3,600. Jerome may
deduct $1,800 as alimony.

26. On August 1 of this year, Bart Barnes transferred property to his former spouse in
settlement of marital rights, under a divorce instrument effective July 26. The property
cost $10,000 and had a fair market value of $20,000 when transferred. Bart will
recognize gain on the transfer.

27. Cal Cotton, under a divorce instrument, is required to make mortgage payments and pay
real estate taxes and insurance premiums on property owned by him but used by his
former wife as her residence. Cal may deduct these payments as alimony.

28. In order to limit the extent that "front-loaded" payments may qualify as alimony, a
recapture rule may apply to the part of the payments made in the first two post-
separation years that exceed $25,000 a year.

29. Paul and Joan divorced in 2018. They have two children, ages five and ten. The divorce
decree requires Joan to pay $300 a month to Paul and does not specify the use of the
money. According to the decree, the payments will stop after the children reach 18. Joan
may deduct payments as alimony.

30. Gross income is a taxpayer's total income less exclusions.

31. Makayla, a cash basis saleswoman, receives commissions in February 2019 based on
sales made in the last quarter of 2018. The commissions are includible in 2018 gross
income.

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4 CCH Federal Taxation—Basic Principles

32. Abigail deposited $10,000 in a bank to purchase a 6 month money market certificate
which matures in 2018. Abigail is required to include this interest as income for tax year
2018.

33. Todd, a politician, uses political contributions to pay his household electric bill. The
amount used to pay the electric bill is taxable income to Todd.

34. Eric agrees to paint Naomi's porch if Naomi pays $200 to Eric's elderly mother. The
$200 is included in Eric's gross income.

35. All interest on United States savings bonds is tax-exempt.

36. Harry and Wilma are divorced in 2018. Payments from Harry to Wilma under a 2018
property settlement agreement may qualify for alimony treatment.

37. Ed and Edna are divorced in 2018. The couple has one child, age 11. Under a 2018
divorce instrument, Edna is to pay Ed alimony of $1,000 per month. Alimony payments
will be reduced by $600 a month when the child reaches 18. Under this fact situation,
$600 of the $1,000 a month payment from Edna to Ed is treated as nondeductible child
support.

38. Interest was credited to Jane's savings account on December 31, 2018. As long as Jane
leaves the interest in the account and does not withdraw it, the interest is not taxable to
her.

39. Mr. Barley, an accountant, accepted a painting for his office from his client in lieu of
payment of his customary fee of $400 for preparation of a tax return. He must include
the $400 in income.

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MULTIPLE CHOICE QUESTIONS—CHAPTER 4

40. All of the following are considered "constructive receipt" of income, except:

a. Lori was informed her check for services rendered was available but she did not
pick it up.

b. Pierre earned income that was received by his agent but was not received by
Pierre.

c. Jacque bought a 9-month certificate of deposit in November 2018. It earned $200

interest in 2018. She can withdraw the principal and interest in 2018 if she pays a
penalty of one month's interest ($100).

d. A payment on a sale of real property place in escrow pending settlement at which

time title would convey.

41. In which of the following situations will the divorced custodial parent be entitled to the
dependency exemption for the child?

a. The noncustodial parent provides $1,500 of support for the child and the custodial
parent provides $1,200.

b. The custodial and noncustodial parent both provide $1,500 of support for the
child.

c. The custodial parent provides $1,500 of support for the child and the noncustodial
parent provides $1,200.

d. All of the above.

42. In July 2010, Dan Farley leased a building to Robert Shelter for a period of 15 years at a
monthly rental of $1,000 with no option to renew. At that time the building had a
remaining estimated useful life of 20 years. Prior to taking possession of the building,
Shelter made improvements at a cost of $18,000. These improvements had an estimated
useful life of 20 years at the commencement of the lease period. The lease expired on
June 30, 2018, at which point the improvements had a fair market value of $2,000. The
amount that Farley, the landlord, should include in his gross income for 2018 is:

a. $6,000

b. $8,000

c. $12,000

d. $24,000

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6 CCH Federal Taxation—Basic Principles

43. Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a
bachelor's degree. During 2018, he received the following payments:

State scholarship for tuition $3,600

Loan from college financial aid office 1,500
Cash support from parents 3,000
Cash dividends on qualified investments 700
Cash prize award in contest 500
$9,300

What is Burrows's adjusted gross income for 2018?

a. $1,100

b. $1,200

c. $4,800

d. $9,300

44. Kevin is a candidate for an undergraduate degree at a local university. During 2018 , he
was granted a fellowship that provided the following:

Tuition $18,000
Books and supplies 2,000
Room and board 14,800

What amount can Kevin exclude from gross income in 2018?

a. $18,000

b. $20,000

c. $25,000

d. $32,800

e. $34,800

45. Jerry, a general contractor by trade, is a tenant of Montgomery

Apartments. In exchange for four months rent ($900/month), Jerry
provided the following items and services for Paul, the owner of the
apartments:

Paint and miscellaneous supplies for the apartments $ 700

Labor for painting and miscellaneous repairs 1,000
Labor and supplies for paving the apartment parking area 1,900

How should Paul treat this transaction on his 2018 Schedule E?

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a. Rental income of $3,600 and rental expenses of $3,600.

b. No rental income or rental expenses are to be reflected on the Schedule E because

the net effect is 0.

c. Rental income of $3,600 and depreciation computed on the capital expenditures of

$3,600.

d. Rental income of $3,600, rental expenses of $1,700, and depreciation computed

on the capital expenditures of $1,900.

46. Mason, an accrual basis taxpayer, owns a six-unit apartment building for which he
receives rent of $600 per month per unit. In 2018, five of the units were rented for the
entire twelve-month period. The sixth unit was occupied from January 1st through
March 31st. Upon vacating the unit, the tenant was not refunded his security deposit of
$400 due to damages to the unit. The unit was subsequently rented for one year
beginning August 1, 2018. On August 1st, the new tenant paid the first and last month's
rent and a refundable security deposit of $400. What is Mason's total rental income for
2018?

a. $40,800

b. $41,200

c. $41,800

d. $42,200

47. Each of the following would be one of the requirements for a payment to be alimony
under instruments executed after 1984 except:

a. Payments are required by a divorce or separation instrument.

b. Payments can be a noncash property settlement.

c. Payments are not designated in the instrument as not alimony.

d. Payments are not required after death of the recipient spouse.

48. All of the following are requirements for a payment to be alimony (under instruments
executed after 1984), except:

a. Payments can be in cash or property.

b. Payments cannot be a transfer of services.

c. Payments are required by a divorce or separation instrument.

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8 CCH Federal Taxation—Basic Principles

d. Payments are not required after death of the recipient spouse.

49. James and Edna Smith are a childless married couple who lived apart for all of 2018.
On December 31, 2018, they were legally separated under a decree of separate
maintenance. Which of the following is the only filing status choice available to them
for 2018?

a. Married filing joint return.

b. Married filing separate return.

c. Head of household.

d. Single.

50. Richard and Alice Kelley lived apart during 2018 and did not file a joint tax return for
the year. Under the terms of the written separation agreement they signed on July 1,
2015, Richard was required to pay Alice $1,500 per month of which $600 was
designated as child support. He made 12 such payments in 2018. Assuming that Alice
has no other income, her tax return for 2018 should show gross income of:

a. $0

b. $5,400

c. $10,800

d. $12,600

51. Which of the following is not considered "constructive receipt" of income?

a. Ms. K was informed her check for services rendered was available on December
16, 2018, but she waited until January 16, 2019 to pick up the check.

b. Earned income of Mr. D was received by his agent on December 30, 2018, but not
received by D until January 3, 2019.

c. Mr. W received a check on December 30, 2018 for services rendered, but was
unable to make a deposit until January 3, 2019.

d. A payment on a sale of real property was placed in escrow on December 16, 2018,
but not received by Ms. B until January 10, 2019, when the transaction was
closed.

52. Under the terms of their divorce agreement executed in October 2018, Keith transferred
Corporation M stock to his former wife, Karen, as a property settlement. At the time of
the transfer, the stock had a basis to Keith of $20,000 and a fair market value of
$50,000. What is the tax consequence of this transaction to Keith, and what is Karen's
basis in the Corporation M stock?

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a. Keith has a gain of $30,000; Karen's basis is $20,000.

b. Keith has a gain of $30,000; Karen's basis is $50,000.

c. Keith has no gain or loss; Karen's basis is $20,000.

d. Keith has no gain or loss; Karen's basis is $50,000.

53. Stan and Anne were divorced in January 2018. The provisions of the divorce decree and
Anne's obligations follow:

(1.) Transfer the title in their resort condo to Stan. At the time of the transfer, the condo
had a basis to Anne of $75,000, a fair market value of $95,000; it was subject to a
mortgage of $65,000.

(2.) Anne is to make the mortgage payments for 17 years regardless of how long Stan
lives. Anne paid $8,000 in 2018.

(3.) Anne is to pay Stan $1,000 per month, beginning in February, for 10 years or until
Stan dies. Of this amount, $300 is designated as child support. Anne made five
payments of $900 each in 2018 (February-June).

What is the amount of alimony from his settlement that is includible in Stan's gross
income for 2018?

a. $3,000

b. $3,500

c. $11,000

d. $38,500

54. During 2018, Milton Hanover was granted a divorce from his wife. The divorce decree
stipulated that he was to pay both alimony and child support for a specified period of
time. In examining his records for 2018, the following information is
available:

Salary $50,000
Interest received on bank deposits 2,000
Interest received on municipal obligations 1,000
$53,000
Alimony paid 3,600
Child support 4,800

What is Hanover's adjusted gross income for 2018?

a. $44,600

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10 CCH Federal Taxation—Basic Principles

b. $48,400

c. $49,400

d. $52,000

55. Mark Mayer, a cash basis taxpayer, leased property on June 1, 2018, to Perry Purly at
$325 a month. Perry paid Mark $325 as a security deposit which will be returned at the
end of the lease. In addition, Perry paid $650 in advance rent which is to be applied as
rent to the last two months in the lease term. The lease is to run for a two-year period.
What is Mark's rental income for 2018?

a. $1,950

b. $2,275

c. $2,600

d. $2,925

e. $3,250

56. Percy Peterson received a grant from the Department of Education for a special research
project on education. He received $500 per month for the period May 1 to December
31. Percy is not a candidate for a degree. The amount of the fellowship he may exclude
from income for the tax year is:

a. $0

b. $1,600

c. $2,400

d. $3,000

e. $4,000

57. Which one of the following distributions is nontaxable?

a. Mutual fund distributions from its net realized long-term capital gains in the
amount of $1,000. You have an adjusted basis of $10,000 in the mutual fund.

b. Return of capital distribution from a utility company in the amount of $2,000. You
have a zero basis in this stock.

c. Dividend on insurance policy in the amount of $1,000. As of the date of this

dividend your net premiums exceed the total dividends by $3,500.

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d. Your share of an ordinary dividend received by an S corporation in the amount of

$25,000.

58. Johnny, a cash basis taxpayer, owns two rental properties. Based on the following
information, compute the amount that he must include in his 2018 gross rental
income.

Property #1, security deposit on one-year lease received 2/1/18. $ 500

All of deposit returned at lease end
Property #1, payment received 2/1/18 for last month of lease 700
(1/18)
Property #1, rental income received in 2018 (2/17-12/17) 7,700
Property #2, rental income received in 2018 (1/17-12/17) 9,000
Property #2, security deposit received 1/1/18 to be used for last 750
month's rent
Property #2, rent 1/19 received 12/28/18 800

a. $16,700

b. $17,500

c. $18,200

d. $18,950

59. Troy, a cash basis taxpayer, owns an office building. His records reflect the following
for 2018. On March 1, 2018, office B was leased for twelve months. A $900 security
deposit was received which will be used as the last month's rent. On September 30,
2018, the tenant in office A paid Troy $3,600 to cancel the lease expiring on March 31,
2018. The lease of the tenant in office C expired on December 31, 2018, and the tenant
left improvements valued at $1,400. The improvements were not in lieu of any required
rent. Considering just these three amounts, what amount must Troy include in rental
income on his income tax return for 2018?

a. $5,900

b. $5,000

c. $4,500

d. $1,800

60. Which of the following statements is correct?

a. Stock dividends are distributions made by a corporation of another corporation's

stock.

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12 CCH Federal Taxation—Basic Principles

b. In computing basis for new stock received as a result of a nontaxable dividend, it

is immaterial whether the stock received is identical or not to the old stock.

c. If a stock dividend is taxable, the basis of the old stock does not change.

d. If you receive nontaxable stock rights and allow them to expire you have a tax
deductible loss.

61. With regard to stock dividends, all of the following statements are correct except:

a. Stock dividends are distributions made by a corporation of its own stock.

b. In computing basis for new stock received as a result of a nontaxable dividend, it

is immaterial whether the stock received is identical or not to the old stock.

c. If a stock dividend is taxable, the basis of the old stock does not change.

d. If a stock dividend is not taxable, a division must be made in the basis between the
old and new stock.

62. Which of the following items is not taxable?

a. Interest on U.S. Treasury bills, notes, and bonds issued by an agency of the United
States

b. Interest on federal income tax refund

c. Interest on New York State bonds

d. Discount income in installment payments received on notes bought at a discount

e. Amount received from a condemning authority to compensate for a delay in

paying an award

63. All of the following distributions of stock dividends are taxable except:

a. The shareholders have the choice to receive cash or other property instead of stock
or stock rights.

b. The distribution of common stock is made on a prorated basis on common stock

outstanding.

c. The distribution gives cash or other property to some shareholders and an increase
in the percentage interest in the corporation's assets or earnings and profits to other
shareholders.

d. The distribution gives preferred stock to some common stock shareholders and
common stock to other common stock shareholders.

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64. Alex Burg, a cash basis taxpayer, earned an annual salary of $80,000 at Ace Corp. in
2018, but elected to take only $50,000. Ace, which was financially able to pay Burg's
full salary, credited the unpaid balance of $30,000 to Burg's account on the corporate
books in 2018, and actually paid this $30,000 to Burg on April 25, 2019. How much of
the salary is taxable to Burg in 2018?

a. $50,000

b. $60,000

c. $65,000

d. $80,000

65. Bob Buttons, a cash basis calendar year taxpayer, owns and operates an apartment
building. During 2018, he received the following payments:

Lease cancellation fee from an old tenant $500

Rent from a new tenant covering the period from July 1, 2019 5,000
Security deposit on June 30, 2018, to be returned to the tenant
if no damage has occurred 700

What is the amount of Bob's gross rental income for 2018?

a. $1,750

b. $2,450

c. $5,500

d. $6,200

66. In return for $1,000, Mr. Hand cancels Mr. Sandwich's debt of $4,000. The cancellation
is not a gift and Mr. Sandwich is neither insolvent nor bankrupt. Which of the following
statements is correct?

a. Mr. Hand has $1,000 taxable income.

b. Mr. Sandwich has $3,000 of taxable income.

c. Mr. Sandwich has $4,000 of taxable income.

d. Neither Mr. Hand nor Mr. Sandwich has any taxable income from this transaction.

67. Which of the following is considered a nonbusiness bad debt?

a. Tom, a CPA, made personal loans to several friends who were not his clients.
Three of the loans became totally worthless.

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14 CCH Federal Taxation—Basic Principles

b. Mary obtained a court-order for her former husband, Bill, to pay child support.
Bill did not pay the child support.

c. Kirby guaranteed a loan as a gesture of friendship for Sue. Sue defaulted and
Kirby paid off the loan.

d. None of these.

68. All of the following are included in gross income for federal tax purposes, except:

a. Interest from School District Bonds

b. Illegal income

c. Alimony

d. Christmas Bonus

69. Which of the following are taxable to the recipient for federal income tax purposes?

a. Monetary gift.

b. Bequest of property.

c. Amount received in settlement of a will contest.

d. An assignment of income from property.

e. None of these is generally taxable to the recipient.

70. In 2018, Norm, a carpenter, received a beach boat from the Newport Marina in
exchange for carpentry work on a new dock. The beach boat cost the marina $1,600.
The fair market value of the boat is $2,000. What amount, if any, is includible in Norm's
2018 gross income as a result of this transaction?

a. $2,000

b. $1,800

c. $1,600

d. $400

e. $0

71. Maria had municipal bond interest of $6,000, certificate of deposit interest of $4,000,
reinvested corporate bond interest of $2,000, mutual fund municipal bond interest of
$7,000 and savings account interest of $1,000. What is Maria's taxable interest?

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15 Testbank

a. $3,000.

b. $7,000.

c. $20,000.

d. $16,000.

72. Starting in 2018, Mr. West must pay his former spouse $20,000 annually under a
divorce decree in the following amounts:

• $1,000 a month for mortgage payments (including principal and interest) on a

jointly owned home until she dies

• $200 a month for tuition fees paid to a private school until their son attains the age
of 18 or leaves the school prior to age 18

• $5,000 a year cash payment to former Mrs. West until she dies

• In addition to the above amounts, the former Mrs. West also received in 2018 a
lump-sum amount of $150,000 from the sale of their other marital assets.

Assume the parties did not file a joint return and were not members of the same
household. Also, assume that there were no written statements between the parties as to
how the amounts should be treated. What is the amount of Mr. West's 2018 alimony
deductions?

a. $20,000

b. $155,000

c. $17,600

d. $11,000

73. Holly and Harp Oaks were divorced in 2014. The divorce decree was silent regarding
the exemption for their 12-year-old daughter, June. Holly has legal custody of her
daughter and did not sign a statement releasing the exemption. Holly earned $8,000 and
Frank earned $80,000. June had a paper route and earned $3,000. June lived with Harp
4 months of the year and with Holly 8 months. Who may claim the exemption for June
in 2018?

a. June may, since she had gross income over $3,000 and files her own return.

b. Since June lived with both Holly and Harp during the year, they both may claim
her as an exemption.

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16 CCH Federal Taxation—Basic Principles

c. Holly may, since she has legal custody and physical custody for more than half the
year.

d. Harp may, since he earned more than Holly and, therefore, is presumed to have
provided more than 50% of June's support.

74. Which of the following in not a payment deductible as alimony?

a. Payments for life insurance premiums required by the divorce decree.

b. Payments for medical expenses of your spouse under the terms of the divorce
decree.

c. Half of the mortgage payment on a home jointly owned with your ex-spouse when
required by the divorce decree

d. Payments for child support required by the divorce decree

75. Based on the following 2018 events, how much should Rachel include in
income on her federal income tax return?

Jury awarded punitive damages $10,000

Kickbacks on sale of goods (not treated as a reduction elsewhere) 5,000
Money borrowed from a bank 8,000
Increase in the value of an asset 1,000

a. $10,000

b. $15,000

c. $16,000

d. $24,000

76. Harry purchased one share of common stock in a computer company for $90. Shortly
after he purchased it, the corporation distributed two new shares of common stock for
each share held. What is his basis for each of the three shares of common stock?

a. $90

b. $180

c. $30

d. $0

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77. Nature Corporation declared and distributed a stock dividend of 1 share for each 10
shares held by stockholders. Donna had 100 shares ($5.50 per share basis) and received
10 additional shares with a fair market value of $6.00 per share. Which of the following
is most applicable to the stock dividend?

a. 100 shares at $5.50 per share basis and 10 shares at zero basis per share.

b. 110 shares at $5 per share basis and $55 taxable income.

c. 110 shares at $5 per share.

d. 100 shares at $5 per share basis and 10 shares at $6 per share basis.

78. Which of the following is true regarding a nonbusiness bad debt?

a. It is deductible as a short-term capital loss.

b. It is not deductible.

c. It is deductible only if you itemize.

d. It is deductible as a long-term capital loss.

79. John, a cash basis taxpayer, had a $5,000 loan from his local credit union. He lost his
job and was unable to make the payments on this loan. The credit union determined that
the legal fees to collect might be higher than the amount John owed so they canceled the
$3,000 remaining amount due on the loan. John did not file bankruptcy nor was he
insolvent. How much must John include in his income as a result of this occurrence?

a. $5,000

b. $3,000

c. $0

d. $8,000

© 2018 CCH Incorporated and its affiliates. All rights reserved. Chapter 4
18 CCH Federal Taxation—Basic Principles

SUPPLEMENTARY PROBLEMS—CHAPTER 4

Problems 80-82 and 86 have been adapted from the IRS Examinations. Problem 85
has been adapted from the AICPA Examinations.

80. Art Aubrey owns and operates an apartment building. During 2018 , he received the
following:

Payment on 6/1/18 for 12 months of advance rent $4,800

Monthly rent payments 43,200
Security deposits to be returned to tenants at end of lease 3,000
Payments for cancelling a lease 400
Deductible maintenance rental expenses paid by tenants 600

What is Art's gross rental income?

81. In 2018, Uriah Stone received the following payments:

Interest on refund of federal income tax for 2017 $ 400

Interest on award for personal injuries in 2014 automobile accident 300
Interest on municipal bonds 1,500
United States savings bonds interest (Series H) 1,000

What amount, if any, should Mr. Stone report as interest income on his 2018 tax return?

82. Betty Brewster received the following interest:

Luggage gift for purchasing a four-year certificate of deposit (fair

market value) $50
Interest on passbook savings account 15
Interest on certificate of deposit 200
Dividends on share account savings in credit union 150
Interest on State of Mississippi bonds issued to finance state highway
construction 300

What is the amount of interest income to be included in income?

83. Ron Remy enters into a three-year lease to rent his property. In the first year, in addition
to $9,600 for the year's rent, he received $1,600 in advance as rent for the last two
months of the lease and $800 as a security deposit which he plans to return to the tenant
at the end of the lease. What amount must be reported as income by Ron?

84. Bob and Alice Marshall were divorced on March 1, 2018. The following transactions
are the terms of the decree:

(a.) Alice will transfer title of the family home to Bob. The house has a fair market value
of $80,000.

© 2018 CCH Incorporated and its affiliates. All rights reserved. Chapter 4
19 Testbank

(b.) Both children will live with Alice.

(c.) Bob will give Alice $2,000 per month for alimony. Also, he is to give Alice $600 per
month for child support.

Determine how the above transactions affect Bob and Alice's tax liabilities.

85. Emil and Judy Ryan are married and file a joint return. They have no children. Emil is
68 and Judy is 60. They contribute over half of the support for Judy's mother, Cora, age
85, who earned $800 from baby-sitting jobs and received $1,900 in social security
benefits during 2018. Cora lives alone in her own apartment. Emil earned a salary of
$60,000 in 2018 from his job at Korma Corp., where Emil is covered by his employer's
pension plan. Judy, who worked part time in 2018 and earned $1,000, is not covered by
an employer's pension plan. Other items received jointly by Emil and Judy in 2018
were as follows:

Life insurance proceeds refund 100

Interest on life insurance policy's accumulated
dividends 300
Dividends on stock of a Swiss corporation 500
Dividend on life insurance policy 200

(a.) How much of the life insurance proceeds should be reported by the Ryans in their
2018 return?

(b.) How much interest income should be reported by the Ryans in their 2018 return?

86. Zelda Zayer has been a widow for over three years and files a return as a single
taxpayer. Items of income received by Zelda in 2018 were as follows:

Interest on insurance dividends left on deposit with North

American $50
Interest on state income tax refund 25
Gambling winnings 2,400
Dividends from mutual life insurance company on life
insurance policy 500
Dividends from Better Auto Co. received on January 2, 2018 875

Total dividends received on the life insurance policy do not exceed the aggregate of the
premiums paid to the company.

(a.) How much should Zelda include in her 2018 taxable income as interest?

(b.) How much should Zelda report as dividend income for 2018?

(c.) How much should Zelda include in taxable "Other Income" for her state lottery
winnings?

© 2018 CCH Incorporated and its affiliates. All rights reserved. Chapter 4