37: Drake
Appliance Company, an accrual basis taxpayer, sells home appliances and service
contracts. Determine the effect of each
of the following transactions on the company’s 2013 gross income assuming that
the company uses any available options to defer its taxes.
a. In December, 2012, the company received a $1,200 advance payment from a
customer for an appliance that Drake special ordered from the
manufacturer. The appliance did not
arrive from the manufacturer until January 2013, and Drake immediately
delivered it to the customer. The sale
was reported in 2013 for financial accounting purposes.
b.
In October 2013, the company sold a 6 month
service contract for $240. The company
also sold a 36 month service contract for $1,260 in July 2013.
c.
On December 31, 2013, the company sold an
appliance for $1,200. The company
received $500 cash and a note from the customer for $700 and $260 interest, to
be paid at the rate of $40 a month for 24 months. Because of the customer’s poor credit record,
the fair market value of the note was only $600. The cost of the appliance was $750.
38: Freda is a
cash basis taxpayer. In 2013, she
negotiated her salary for 2014. Her
employee offered to pay her $21,000 per month in 2014 for a total of
$252,000. Freda countered that she would
accept $10,000 each month for 12 months in 2014 and the remaining $132,000 in
January 2015. The employer accepted
Freda’s terms for 2014 and 2015.
a. Did Freda actually or constructively receive $252,000 in 2014?
b.
What could explain Freda’s willingness to
spread her salary over a longer period of time?
c.
In December 2014, after Freda earned the
right to collect the $132,000 in 2015, the employer offered $133,000 to Freda
at that time, rather than $132,000 in January 2015. The employer wanted to make the early payment
so as to deduct the expense in 2014.
Freda rejected the employer’s offer.
Was Freda in constructive receipt of the income in 2014? Explain
39: The Bluejay
Apartments, a new development, is in the process of structuring its lease
agreements. The company would like to
set the damage deposits high enough that tenants will keep the apartments in
good condition. The company is actually
more concerned about damage than about tenants not paying their rent.
a. Discuss the tax effects of the following alternatives:
·
$1,000 damage deposit with no rent
prepayment.
·
$500 damage deposit and $500 rent for the
final month of the lease.
·
$1,000 rent for the final two months of the
lease and no damage deposit
b.
Which option do you recommend? Why?
43: In 2013, Alva
received dividends on her stocks as follows:
|
Amur Corporation (a French corporation whose stock is |
$ 60,000 |
|
Blaze, Inc., a Delaware corporation |
40,000 |
|
Grape, Inc. a Virginia corporation |
22,000 |
a. Alva purchased the Grape stock three years ago, and she purchased the
Amur stock two years ago. She purchases
the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at
a $5,000 loss. Alva had no other capital
gains and losses for the year. She is in
the 35% marginal tax bracket. Compute
Alva’s tax on her dividend income for 2013.
b.
Alva’s daughter, who is 25 and not Alva’s
dependent had taxable income of $6,000, which included $1,000 of dividends on
Grape, Inc. stock. The daughter had
purchased the stock two years ago.
Compute the daughter’s tax liability on the dividends.
c.
Alva can earn 5% before-tax interest on a
corporate bond or a 4% dividend on a preferred stock. Assuming that the appreciation in value is
the same, which investment produces the greater after-tax income?
d.
The same as part (c), except that Alva’s
daughter is to make the investment.
45: Nell and Kirby
are in the process of negotiating their divorce agreement. What should be the tax consequences to Nell
and Kirby if the following, considered individually, became part of the
agreement?
a. In consideration for her one-half interest in their personal residence,
Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of
cash. Kirby’s cost of the stock was
$150,000, and the value of the personal residence is $500,000. They purchased the residence three years ago
for $300,000.
b.
Nell will receive $1,000 per month for 120
months. If she dies before receiving all
120 payments, the remaining payments will be made to her estate
c. Nell is to have custody of their 12-year-old son, Bobby. She is to receive $1,200 per month until
Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell
will receive only $300 per month for the remainder of her life.
46: Samantha and Harold are in the
process of negotiating a divorce. They
have tentatively agreed on all of the terms, and Samantha is to pay Harold
$240,000 over a three year period.
Furthermore, the payments are to be spread over the three years in
amounts that will qualify as alimony and minimize alimony recapture. Harold wants to receive as much of the
$240,000 as soon as possible because if he dies or remarries within three
years, the payments will cease. Which of
the following two patterns of payments will result in the least alimony recapture
in year 3?
|
Year |
Option 1: Amount |
Option 2: Amount |
|
1 |
$120,000 |
$100,000 |
|
2 |
60,000 |
80,000 |
|
3 |
60,000 |
60,000 |
|
Total |
48: 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 at 4% if his father will guarantee the debt. Roy’s father, Hal, owns a $150,000 CD
currently yielding 3.5%. The Federal
rate 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?
49: Ridge is a generous
individual. During the year, he made
interest-free loans to various family members when the Federal rate was
3%. What are the tax consequences of the
following loans by Ridge?
a. On June 30, 2013, Ridge loaned $12,000 to his cousin, Jim, to buy a used
truck. Jim’s only source of income was
his wages on various construction jobs during the year.
b.
On August 1, 2013, Ridge loaned $8,000 to his
niece, Sonja. The loan was to enable her
to pay her college tuition. Sonja had
$1,200 interest income from CDs her parents had given her.
c.
On September 1, 2013, Ridge loaned $25,000 to
his brother, Al, to start a business. Al
had $220 of dividends and interest for the year.
d. On September 30, 2013, Ridge loaned $150,000 to his mother so that she
could enter a nursing home. His mother’s
only income was $9,000 of Social Security benefits and $500 of interest income.
