50: Indicate whether the imputed
interest rules should apply in the following situations. Assume that all of the loans were made at the
beginning of the tax year unless otherwise indicated.
a. Mike loaned his sister $90,000 to buy a new home. Mike did not charge interest on the
loan. The Federal rate was 5%. Mike’s sister had $900 of investment income
for the year.
b.
Sam’s employer maintains an emergency loan
fund for its employees. During, the
year, Sam’s wife was very ill, and he incurred unusually large medical
expenses. He borrowed $8,500 from his
employer’s emergency loan fund for six months.
The Federal rate was 5.5%. Sam
and is wife had no investment income for the year.
c.
Jody borrowed $25,000 from her controlled
corporation for six months. She used the
funds to pay her daughter’s college tuition.
The corporation charged Jody 4% interest. The Federal rate was 5%. Jody had $3,500 of investment income for the
year.
d.
Kait loaned her son, Jake, $60,000 for six
months. Jake used the $60,000 to pay off
college loans. The Federal rate was 5%,
and Kait did not charge Jake any interest.
Jake had dividend and interest income of $2,100 for the tax year.
51: Vito is the sole shareholder of
Vito, Inc. He is also employed by the
corporation. On June 30, 2013, Vito
borrowed $8,000 from Vito, Inc. and on July 1, 2014, he borrowed and additional
$10,000. Both loans were due on
demand. No interest was charged on the
loans, and the Federal rate was 4% for all relevant dates. Vito used the money to purchase a boat, and
he had $2,500 of investment income.
Determine the tax consequences to Vito and Vito, Inc., in each of the
following situations:
a. The loans are considered employer-employee loans.
b. The loans are considered corporation-shareholder loans.
52: Pam retires after 28 years of
service with her employer. She is 66
years old and has contributed $42,000 to her employer’s qualified pension fund. She elects to receive her retirement benefits
as an annuity of $3,000 per month for the remainder of her life.
a. Assume that Pam retires in June 2013 and collects six annuity payments
this year. What is her gross income from
the annuity payments in the first year?
b.
Assume that Pam lives 25 years after
retiring. What is her gross income from
the annuity payment sin the twenty-fourth year?
c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of
her death. What are Pam’s gross income
and deductions from the annuity contract in the year of her death?
53: For each of the following,
determine the amount that should be included in gross income:
a. Peyton was selected the most valuable player in the Super Bowl. In recognition of this, he was awarded an
automobile with a value of $60,000.
Peyton did not need the automobile, so he asked that the title be put in
his parents’ names
b.
Jacob was awarded the Nobel Peace Prize. When he was presented the check for $1.4
million, Jacob said, “I do not need the money.
Give it to the United Nations to use toward the goal of world
peace.”
c. Linda won the Craig County Fair beauty pageant. She received a $10,000 scholarship that paid
her $6,000 for tuition and $4,000 for meals and housing for the academic
year.
Assignment #1 – Chapter 18
33: Compute Mary’s income or
deductions for 2013 using (1) the cash basis and (2) the accrual basis for each
of the following?
a.
In May 2013, Mary paid a license fee of
$1,200 for the period June 1, 2013 through May 31, 2014.
b. In December 2013, Mary collected $10,000 for January 2014 rents. In January 2014, Mary collected $2,000 for
December 31, 2013 rents.
c. In June 2013, Mary paid $7,200 for an office equipment service contract
for the period July 1, 2013 through December 31, 2014.
d. In June 2012, Mary purchased office furniture for $273,000. She paid $131,000 in cash and gave a $142,000
interest-bearing note for the balance.
The office furniture has an MACRS cost recovery period of seven
years. Mary did not make the $179 election
and elected not to take additional first-year depreciation.
34: What accounting method (cash or
accrual) would you recommend for the following businesses?
a. A gift shop with average annual gross receipts of $900,000.
b.
An accounting partnership with annual gross
receipts of $12 million.
c. A drywall subcontractor who works on residences and has annual gross
receipts of $3 million.
35: Blue Company, an architectural
firm, has a bookkeeper who maintains a cash receipts and disbursements
journal. At the end of the year (2013),
the company hires you to convert the cash receipts and disbursements into
accrual basis revenues and expenses. The
total cash receipts are summarized as follows:
|
Cash sales |
$150,000 |
|
Collection on accounts receivable |
350,000 |
|
Bank Loan |
90,000 |
|
Total cash receipts |
$590,000 |
The accounts receivable from customers at the end of the
year are $120,000. You note that the
accounts receivable at the beginning of the year were $190,000. The cash sales included $20,000 of prepayments
for services to be provided over the period January 1, 2013 through December
31, 2015.
a. Compute the company’s accrual basis gross income for 2013.
b.
Would you recommend that Blue use the cash
method or the accrual method? Why? Blue
should use the cash method. If it uses
the accrual method, it must pay taxes on its uncollected accounts receivable.
c. The company does not maintain an allowance for uncollectible
accounts. Would you recommend that such
an allowance be established for tax purposes? Explain.
36: How do the all events and
economic performance requirements apply to the following transactions by an
accrual basis taxpayer?
a. The company guarantees its products for six months. At the end of 2013, customers had made valid
claims for $600,000 that were not paid until 2014. Also, the company estimates that another
$400,000 in claims from 2013 sales will be filed and paid in 2014.
b.
The accrual basis taxpayer reported $200,000,
in corporate taxable income from 2013.
The state income tax rate was 6%.
The corporation paid $7,000 in estimated state income taxes in 2013 and
paid $2,000 on 2012 state income taxes when it filed its 2012 state income tax
return in March 2013. The company filed
its 2013 state income tax return in March 2014 and paid the remaining $5,000 of
its 2013 state income tax liability.
c. An employee was involved in an accident while making a sales call. The company paid the injured victim $15,000
in 2013 and agreed to pay the victim $15,000 a year for the next nine years.
