Fundamentals of Taxation 2018 Edition 11Th Edition By Ana Cruz – Test Bank
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Sample Test
Fundamentals of Taxation 2018 Edition, 11e (Cruz)
Chapter 3 Gross Income: Inclusions and Exclusions
1) For tax purposes, income is recognized if the transaction
meets three conditions: economic benefit, occurrence and completion, and not
exempt from tax.
Answer: TRUE
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
2) Lisa performed bookkeeping services for Donald charging him
$650. Donald agreed that he would pay Lisa’s credit card bill for the same
amount. Lisa has received an economic benefit and must report $650 in income on
her tax return.
Answer: TRUE
Explanation: Even though Lisa was not given the cash,
income was realized because she received an economic benefit. Her debt was
paid.
Difficulty: 2 Medium
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
3) Jeff owns 250 shares of Coca Cola common stock that have
increased in value by $15 each. He must report the increase in income because a
transaction has occurred.
Answer: FALSE
Explanation: A transaction has not occurred so income does
not need to be recognized.
Difficulty: 2 Medium
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
4) If the process of a transaction begins and ends with an
economic benefit for the taxpayer, he or she must report it in income even
though the income is specifically exempt from tax.
Answer: FALSE
Explanation: If the income is excluded from taxation, it
will not be included in gross income.
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
5) Almost all individuals use the cash receipts and
disbursements method of accounting.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
6) Constructive receipt means the income is available to or in
the control of the taxpayer regardless of whether the taxpayer chooses to
utilize the income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
7) Income can only be realized in money or services.
Answer: FALSE
Explanation: Income can be realized in any form, whether
in money, property, or services.
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
8) If Lucas, an accountant, agrees to provide tax services to a
neighbor in exchange for the neighbor agreeing to fix his pool, Lucas but not
his neighbor will have to report income on this transaction at fair market value.
Answer: FALSE
Explanation: Both Lucas and his neighbor must recognize
the income.
Difficulty: 2 Medium
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
9) There are some instances where a cash-basis taxpayer can
report income as though he or she is an accrual basis taxpayer.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
10) For most individuals, interest income comes from
interest-earning deposits at banks, savings and loans, or credit unions.
Answer: TRUE
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
11) If an individual owns Series EE bonds, this person must
report interest income, i.e., the increase in bond value on an annual basis.
Answer: FALSE
Explanation: The taxpayer can either report the interest
annually or can defer the interest until the bonds mature, are redeemed, or are
otherwise disposed of, whichever comes first.
Difficulty: 2 Medium
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
12) A taxpayer can exclude from gross income any interest earned
on bonds issued by any state, any possession of the United States, any
political subdivision of either of the foregoing, or of the District of Columbia
as long as these bonds are not issued for private activities.
Answer: TRUE
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
13) Interest on state bonds is tax-exempt if the bonds were
issued for private activities, such as convention centers, industrial parks, or
stadiums.
Answer: FALSE
Explanation: Interest is taxable if received from state or
local bonds issued for private activities.
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
14) A taxpayer must file a Schedule B (Forms 1040A or 1040) if
he or she has received taxable interest of $1,550.
Answer: TRUE
Explanation: Schedule B must be filed if the taxpayer had
more than $1,500 in interest income.
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
15) Dividends are generally taxed at capital gains rates if they
are made from the corporation’s current earnings and profits or accumulated
earnings and profits.
Answer: TRUE
Difficulty: 1 Easy
Topic: Dividend Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
16) A stock dividend in which a shareholder has the option to
receive cash is not taxable.
Answer: FALSE
Explanation: Stock dividends are taxable if the
shareholder has the option to receive cash or other property.
Difficulty: 1 Easy
Topic: Dividend Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
17) Robert received a tax refund in 2017 from his state, which
he deducted on his prior year’s return as an itemized deduction. He must report
the refund in income in 2017, subject to certain computations to determine the
amount that is taxable.
Answer: TRUE
Difficulty: 1 Easy
Topic: State and Local Tax Refunds
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
18) All federal and state unemployment compensation benefits are
not subject to income tax.
Answer: FALSE
Difficulty: 1 Easy
Topic: Unemployment Compensation
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
19) The taxability of social security benefits depends on the
“provisional income” and filing status of the taxpayer.
Answer: TRUE
Difficulty: 1 Easy
Topic: Social Security Benefits
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
20) Jury duty pay is taxable income, but it can be deducted from
gross income if the amount must be given to the employer.
Answer: TRUE
Difficulty: 1 Easy
Topic: Other Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
21) Discounts provided to employees for food by a restaurant
owner are not taxable if the discounts do not exceed the gross profit
percentage of the business.
Answer: TRUE
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
22) The cost of holiday turkeys distributed to employees is
included in the employees’ income.
Answer: FALSE
Explanation: Small tokens, like holiday turkeys, fall
under the de minimis rules and are non-taxable due to the impracticality of
keeping track of each employee’s benefit.
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
23) Employer-paid premiums on group-term life insurance in
excess of $50,000 coverage are taxable to the employees based on the cost of
the excess.
Answer: TRUE
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
24) Payments received under workers’ compensation acts are
taxable to the recipient.
Answer: FALSE
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
25) The initial original issue discount (OID) on a bond is equal
to the difference between the acquisition price and the maturity value.
Answer: TRUE
Difficulty: 1 Easy
Topic: Original Issue Discount
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
26) If a person sells his or her car to a friend for a note
receivable, this person has income that needs to be reported.
Answer: TRUE
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
27) In general, an individual must recognize income on his or
her tax return if the transaction has economic benefit, the transaction has
reached a conclusion and the income from the transaction is tax-exempt income.
Answer: FALSE
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
28) If Alex, an attorney, agrees to provide legal services to a
friend in exchange for the friend agreeing to fix his car, Alex and his friend
will have to report income on this transaction at fair market value.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
29) Receipt of property or services does not trigger income
recognition for tax purposes.
Answer: FALSE
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
30) Banks and credit unions report interest income to taxpayers
on Form 1099-INT.
Answer: TRUE
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
31) When an individual’s marginal ordinary income tax rate is
25% or more and less than 39.60%, the taxation rate on qualified dividends is
15%.
Answer: TRUE
Difficulty: 1 Easy
Topic: Dividend Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
32) Payments received by a taxpayer for unemployment
compensation are not taxable.
Answer: FALSE
Difficulty: 1 Easy
Topic: Unemployment Compensation
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
33) If an employee receives a prize or award from his or her
employer, the award is included in W-2 income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Other Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
34) A de minimis benefit is one whose value is so small that
keeping track of which employees received the benefit is administratively
impractical.
Answer: TRUE
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
35) Taxpayers are not required to “impute interest” on a
deferred payment contract for which no interest, or a low rate of interest, is
stated.
Answer: FALSE
Difficulty: 1 Easy
Topic: Below-Market Interest Rate Loans
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
36) If a taxpayer is economically better off because of a
transaction, the person must normally record income.
Answer: TRUE
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
37) Receipt of property or services will trigger income
recognition.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
38) A taxpayer must report in income imputed interest on a loan
made below market interest rate.
Answer: TRUE
Difficulty: 1 Easy
Topic: Interest Income; Below-Market Interest Rate Loans
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.; 03-05 Apply the rules associated with tax accounting
for savings bond interest used for education expenses, below-market interest
loans, gift loans, and original issue discount debt (Appendix).
EA: Yes
Accessibility: Keyboard Navigation
39) Welfare payments received by a taxpayer must be reported in
income.
Answer: FALSE
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
40) A taxpayer does not have to report part of an original issue
discount (OID) as income every year.
Answer: FALSE
Difficulty: 1 Easy
Topic: Original Issue Discount
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt (Appendix).
EA: Yes
Accessibility: Keyboard Navigation
41) For tax purposes, one of the requirements to recognize
income is:
1. A)
The income can be tax-exempt.
2. B)
The transaction must occur but it’s not necessary to complete it.
3. C)
There must be an economic benefit.
4. D)
All of these.
Answer: C
Explanation: A transaction to be recognized as income must
meet three conditions: economic benefit, occurrence and completion, and not
exempt from tax.
Difficulty: 1 Easy
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
42) If an attorney performs some estate tax work for a client
and the client agrees to pay $6,000 to him and $5,000 to a local financial
institution for a debt the attorney owes, the attorney has income of:
1. A)
$5,000.
2. B)
$11,000.
3. C)
$6,000.
4. D)
None of these.
Answer: B
Explanation: Income is recognized because an economic
benefit was received by the attorney.
Difficulty: 2 Medium
Topic: When and How to Record Income; Cash Method of
Accounting
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.; 03-02 Apply the cash method of accounting to income
taxes.
EA: Yes
Accessibility: Keyboard Navigation
43) Pedro agreed to repair a house for a client and started to
work on December 30, 2015. On January 2, 2017, he completed the job and
received payment from the client. Pedro must record the income in:
2015.
A) 2015.
2016.
B) 2016.
2017.
C) 2017.
2018.
D) Both 2016 and 2017.
Answer: C
Explanation: Constructive receipt of income occurred in
2017.
Difficulty: 2 Medium
Topic: When and How to Record Income; Cash Method of
Accounting
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.; 03-02 Apply the cash method of accounting to income
taxes.
EA: Yes
Accessibility: Keyboard Navigation
44) If Tom, an accountant, agrees to provide accounting services
to Fred, a friend, in exchange for Fred fixing Tom’s office floor, then:
1. A)
Both of them must report income on their tax returns.
2. B)
Fred must report income on his tax return.
3. C)
Neither Tom nor Fred must report income on their tax returns.
4. D)
Tom must report income on his tax return.
Answer: A
Explanation: Receipt of property or services triggers
income recognition.
Difficulty: 2 Medium
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
45) Income may be realized in the form of:
1. A)
Property.
2. B)
Cash.
3. C)
Services.
4. D)
All of these.
Answer: D
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
46) When filing their tax returns, almost all individuals use:
1. A)
The accrual method.
2. B)
The accounting method.
3. C)
The recognition method.
4. D)
The cash receipts and disbursements method.
Answer: D
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
47) Under the cash receipts and disbursements method, the
taxpayer reports income in the year:
1. A)
Income is received.
2. B)
Income is accrued.
3. C)
Income is earned.
4. D)
Income is negotiated.
Answer: A
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
48) Constructive receipt means the taxpayer has:
1. A)
Earned the income.
2. B)
Accrued the income.
3. C)
Control of the income for his or her use.
4. D)
Earned the income and accrued the income.
Answer: C
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
49) A taxpayer can exclude from income interest received from:
1. A)
Municipal bonds issued by the state.
2. B) A
credit union.
3. C) A
seller-financed mortgage transaction.
4. D) A
savings account established at a local bank.
Answer: A
Explanation: Taxpayers can exclude from gross income any
interest earned on bonds issued by any state, any possession of the United
States, any political subdivision of either of the foregoing, or the District
of Columbia.
Difficulty: 1 Easy
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
50) When an individual’s marginal ordinary income tax rate is
25% or more and less than 39.60%, the tax rate on qualified dividends is:
1. A)
5%.
2. B)
15%.
3. C)
0%.
4. D)
10%.
Answer: B
Difficulty: 1 Easy
Topic: Dividend Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
51) What is the tax liability for a single individual who has
taxable income of $115,500, that includes a taxable qualified dividend of
$2,000? All answers should be rounded to the nearest dollar.
762.
A) $24,762.
763.
B) $25,322.
764.
C) $32,411.
765.
D) $25,062.
Answer: D
Explanation: Tax on $113,500 using the schedule tax rate
plus $300 ($2,000 qualified dividend at the rate of 15%).
Difficulty: 3 Hard
Topic: Dividend Income; Tax Liability Computation
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
52) What is the tax liability for a taxpayer who is married
filing jointly with taxable income of $67,500, that includes a taxable qualified
dividend of $1,000? All answers should be rounded to the nearest dollar.
Use the appropriate Tax Tables or Tax Rate Schedules.
125.
A) $10,125.
126.
B) $9,201.
127.
C) $9,046.
128.
D) $9,196.
Answer: C
Explanation: Tax on $66,500 using the tax tables ($1,000 qualified
dividend is not taxed since the marginal rate is less than 25%).
Difficulty: 3 Hard
Topic: Dividend Income; Tax Liability Computation
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
53) An individual must complete Schedule B (Forms 1040A or 1040)
if the following situation occurs:
500.
A) Received interest income of $1,500.
501.
B) Received dividend income of $1,000.
502.
C) Received interest income of $100.
503.
D) Received tax-exempt interest of $700.
Answer: D
Explanation: Schedule B must be completed if a taxpayer
had more than $1,500 of interest income or received tax-exempt interest in any
amount.
Difficulty: 2 Medium
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
54) Tom and Betsy, who are married filing jointly, reported a
standard deduction of $12,600 on their 2016 tax return. They paid $500 to the
state for income taxes in 2016. In 2017, they received a $125 refund of state
taxes paid in 2016. What is the amount that Tom and Betsy need to report on
their 2017 tax return?
1. A)
$0.
2. B)
$125.
3. C)
$375.
4. D)
$500.
Answer: A
Explanation: The refund is not taxable income to Tom and
Betsy in 2017 because they used the standard deduction in 2016.
Difficulty: 2 Medium
Topic: State and Local Tax Refunds
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
55) Ruth, who files as head of household, reported itemized
deductions of $9,400 on her 2016 tax return. Her itemized deductions included
$300 of state taxes paid. In 2017, she received a $175 refund of state taxes
paid in 2016. What is the amount that Ruth needs to report on her 2017 tax
return?
300.
A) $300.
301.
B) $175.
302.
C) $100.
303.
D) $0.
Answer: C
Explanation: Itemized deductions for 2016 of $9,400 less
the standard deduction of $9,300.
Difficulty: 3 Hard
Topic: State and Local Tax Refunds
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
56) Provisional income is calculated by starting with Adjusted
Gross Income (AGI) before social security benefits and adding back specific
items. One of these items is:
1. A)
Qualified dividends.
2. B)
Deducted interest on educational loans.
3. C)
Capital gains.
4. D)
Wages.
Answer: B
Difficulty: 1 Easy
Topic: Social Security Benefits
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
57) Caroline, who files as head of household, received $9,000 of
social security benefits. Her AGI before the social security benefits was
$27,000. She also received $200 of tax- exempt interest. What is the amount of
taxable social security benefits?
1. A)
$9,000.
2. B)
$7,650.
3. C)
$4,500.
4. D)
$3,350.
Answer: D
Explanation: Provisional income is $31,700 ($27,000 + $200
+ $4,500); the taxable amount is the lesser of 50% of the social security
benefits, $4,500 or 50% of the excess of provisional income over $25,000,
$3,350 (50% of ($31,700 − $25,000)).
Difficulty: 3 Hard
Topic: Social Security Benefits
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
58) What item should not be
included in income?
1. A)
Worker’s compensation payments.
2. B)
Jury duty pay.
3. C)
Prizes and awards.
4. D)
Sick pay.
Answer: A
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
59) The following fringe benefit provided by the employer
is not taxable
to the employee:
1. A)
Vacation pay.
2. B)
Employer-paid premiums on group-term life insurance with coverage of $40,000
per person.
3. C)
Educational assistance for up to $10,000 per person.
4. D)
Sick pay.
Answer: B
Explanation: Tax-free coverage is limited to $50,000 per
person.
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
60) Employer-paid premiums on life insurance are not taxable to
the employees, unless the coverage is in excess of ________.
1. A)
$5,000
2. B) $5,250
3. C)
$51,000
4. D)
$50,000
Answer: D
Explanation: Tax-free coverage is limited to $50,000 per
person.
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
61) Payments under written dependent care assistance plans are
tax-free, except that the exclusion for a single person cannot exceed his or
her earned income and cannot exceed ________.
1. A)
$5,000
2. B)
$2,500
3. C) $5,150
4. D)
$5,250
Answer: A
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
62) Marie is a graduate student at a state university. In 2017,
she received a scholarship of $10,500 ($7,000 for tuition and fees and $3,500
for campus housing) and a graduate assistantship that pays $6,000. What is the
amount that she must report on her tax return?
500.
A) $3,500.
501.
B) $9,500.
502.
C) $6,000.
503.
D) $7,000.
Answer: B
Explanation: $3,500 for campus housing and $6,000 for the
graduate assistantship.
Difficulty: 3 Hard
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
63) If a student must perform certain services for the
educational institution (e.g., graduate assistantships), the amount paid for
services is considered:
1. A) A
scholarship.
2. B) A fellowship.
3. C)
Wages.
4. D)
All of these.
Answer: C
Difficulty: 2 Medium
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
64) Employers can reimburse employees for up to ________ per
year of educational assistance, whether or not job-related.
1. A)
$5,250
2. B)
$5,150
3. C)
$5,000
4. D)
$5,520
Answer: A
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
65) Which one of the following items is not exempt under
the umbrella of compensation for injuries or sickness?
1. A)
Payments received for damages as a result of personal physical injuries.
2. B)
Employer-provided adoption assistance.
3. C)
Payments received under workers’ compensation acts.
4. D)
Disability income received from a terrorist attack in a foreign country while
employed by the U.S. government.
Answer: B
Difficulty: 2 Medium
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
66) Life insurance proceeds because of the death of the insured
are fully excludable from the gross income of the recipient if the payment is
made:
1. A) It
does not matter how these payments are made.
2. B)
Over time.
3. C) As
a lump sum.
4. D) It
does not matter how these payments are made and over time.
Answer: C
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
67) Taxable income includes:
1. A)
Sick pay.
2. B)
Child support payments.
3. C)
Welfare payments.
4. D)
Workers’ compensation payments.
Answer: A
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
68) Taxable income does not include:
1. A)
Alimony payments.
2. B)
Qualified dividend payments.
3. C)
Interest payments.
4. D)
Child support payments.
Answer: D
Difficulty: 1 Easy
Topic: Items Excluded from Gross Income
Learning Objective: 03-04 Apply the rules concerning items
excluded from gross income.
EA: Yes
Accessibility: Keyboard Navigation
69) Martin redeemed $3,000 (principal of $2,000 and interest of
$1,000) of Series I Savings Bonds to pay qualified higher education expenses.
His qualified expenses for the year totaled $2,500 and AGI consists of wages of
$20,000. What is the amount of interest that Martin must include in income?
(Round interim calculations to three decimal places)
1. A)
$0.
2. B) $833.
3. C)
$167.
4. D)
$1,000.
Answer: C
Explanation: $167; $833 is the amount excludable from
income, $1,000 × ($2,500/$3,000).
Difficulty: 3 Hard
Topic: Savings Bond Interest Exclusion
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
70) Morris redeemed $6,000 (principal of $4,500 and interest of
$1,500) of Series I Savings Bonds to pay qualified higher education expenses.
His qualified expenses for the year totaled $6,500 and AGI consists of wages of
$32,000. What is the amount of interest that Morris can exclude from income?
1. A)
$0.
2. B)
$500.
3. C) $1,000.
4. D)
$1,500.
Answer: D
Explanation: The total amount of interest, $1,500 is
excludible; qualified expenses are higher than the amount redeemed.
Difficulty: 3 Hard
Topic: Savings Bond Interest Exclusion
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
71) Imputed interest rules do not apply to the following:
1. A)
Sale of property for $3,000 or less.
2. B)
Sale of a personal residence.
3. C)
Sale of a farm for $1 million or less.
4. D)
Both sale of property for $3,000 or less and sale of a personal residence.
Answer: A
Difficulty: 1 Easy
Topic: Below-Market Interest Rate Loans
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
72) Imputed interest rules apply to term loans or demand loans
in which the interest rate is less than the Applicable Federal Rate (AFR).
Which of the following transaction does not fall
under these rules? Assume in all situations that interest is below the AFR.
1. A)
Gift loans of $14,000 in which interest foregone is in the form of a gift.
2. B)
Loans in which a principal purpose is to avoid tax.
3. C)
Loans in which the below-market or interest-free loan would have a significant
effect on the tax liability of the borrower or lender.
4. D)
Both gift loans of $14,000 in which interest foregone is in the form of a gift
and loans in which a principal purpose is to avoid tax.
Answer: A
Explanation: Imputed interest rules apply to Gift loans
OVER $14,000 in which interest foregone is the form of a gift.
Difficulty: 2 Medium
Topic: Below-Market Interest Rate Loans
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
73) Joel purchased $125,000 of A and D Corporation’s newly
issued bonds for $114,500. The bonds carry an interest rate of 8% and mature in
5 years. What is the initial OID on these bonds?
1. A)
$2,000.
2. B)
$2,100.
3. C)
$10,500.
4. D)
$10,000.
Answer: C
Explanation: $10,500, ($125,000 – $114,500).
Difficulty: 2 Medium
Topic: Original Issue Discount
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
74) The original issue discount (OID) rules apply to all debt
instruments with OID, except:
1. A)
Non-business loans of $10,000 or less between natural persons.
2. B)
Tax-exempt debt.
3. C)
U.S. savings bonds.
4. D)
All of these.
Answer: D
Difficulty: 1 Easy
Topic: Original Issue Discount
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
75) An individual with an original issue discount (OID)
instrument must report annually a portion of the OID as:
1. A)
Interest income.
2. B)
Qualified dividend income.
3. C)
Capital gains.
4. D)
Miscellaneous income.
Answer: A
Difficulty: 2 Medium
Topic: Original Issue Discount
Learning Objective: 03-05 Apply the rules associated with
tax accounting for savings bond interest used for education expenses,
below-market interest loans, gift loans, and original issue discount debt
(Appendix).
EA: Yes
Accessibility: Keyboard Navigation
76) On December 30, 2017, Robert agreed to repair a damaged
house wall and started to work on that date. He will finish and get paid for
the job in January of 2018. Robert needs to record the income received from his
work in the year:
2017.
A) 2017.
2018.
B) Half in 2017 and the other half in 2018.
2019.
C) 2018.
2020.
D) He does not have to report the income at all.
Answer: C
Difficulty: 2 Medium
Topic: When and How to Record Income
Learning Objective: 03-01 Describe when and how to record
income for tax purposes.
EA: Yes
Accessibility: Keyboard Navigation
77) Income may be realized in the form of:
1. A)
Services.
2. B)
Money.
3. C)
Property.
4. D)
All of these.
Answer: D
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
78) Under the cash method, an individual reports income when:
1. A)
income is received or constructively received.
2. B)
income is accrued.
3. C)
income is earned.
4. D)
income is received or earned.
Answer: A
Difficulty: 1 Easy
Topic: Cash Method of Accounting
Learning Objective: 03-02 Apply the cash method of
accounting to income taxes.
EA: Yes
Accessibility: Keyboard Navigation
79) Interest income on Series EE and Series E U.S. Savings Bonds
can be reported:
1. A)
only at the maturity date of the bond issue.
2. B)
only on an annual basis.
3. C)
either at the maturity date or on an annual basis.
4. D) No
need to report; this type of interest income is always tax-exempt income.
Answer: C
Difficulty: 2 Medium
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
80) An individual must complete Schedule B (Forms 1040A or 1040)
if the following situation occurs:
600.
A) Received interest income of $600.
601.
B) Received interest income of $1,500.
602.
C) Received interest income of $1,300.
603.
D) Received interest income of $1,750.
Answer: D
Difficulty: 2 Medium
Topic: Interest Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
81) When an individual’s marginal ordinary income tax rate is
less than 25%, the tax rate on qualified dividends is:
1. A)
5%.
2. B)
15%.
3. C)
0%.
4. D)
10%.
Answer: C
Difficulty: 1 Easy
Topic: Dividend Income
Learning Objective: 03-03 Explain the taxability of
components of gross income, including interest, dividends, tax refunds, and
social security benefits.
EA: Yes
Accessibility: Keyboard Navigation
82) Items that must be reported on line 21 (Other Income) of the
Form 1040 include:
1. A)
Wages.
2. B)
Jury duty pay.
3. C)
Capital gains.
4. D)
Tax-exempt dividends.
Answer: B
Difficulty: 1 Easy
Topic: Other Income
Learning Objective: 03-03 Explain the taxability of components
of gross income, including interest, dividends, tax refunds, and social
security benefits.
EA: Yes
Accessibility: Keyboard Navigation
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