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ACC 377 Lecture Notes - Lecture 3: Gross Income, Alimony, Financial Statement

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indigolion532
18 May 2018
School
EMU
Department
Accounting
Course
ACC 377
Professor
Brickner

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Gross income minus deductions allowed
Does a taxpayer who borrows money have gross income? (Receipt of loan)
No, because it's assumed they'll pay it back
Repayment of Loan Principle
taxpayer who loaned money to another does not have gross income when principal is repaid, only gross
income of the interest
If a taxpayer receives cash, what will determine whether the cash constitutes as a deposit?
It will depend on if the taxpayer is legally entitled to keep the cash or not
Realization Requirement
no increase in wealth is included in gross income until it has been realized by the taxpayer (taxpayer
only realizes gross income when stock is sold, not when it fluctuates)
Gross income from services must be included in the gross income of the taxpayer who
___________________________
owns the property
Interest income accrues _______
daily
Dividends are taxed to whomever owns the stock on the ______ date
record
Income in Community Property states (CA, TX)
income is allocable equally to each spouse
What does alimony support?
spouse
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How should alimony be reported on the tax returns of the payor and the recipient?
payor - receives deduction on alimony paid
recipient - includes alimony received on gross income
How should child support be reported on the tax returns of the payor and recipient?
Payor - can't deduct
recipient - not realized as income
Exclusion ratio formula
Investment in contract/Expected return under contract
You may exclude Group Term Life Insurance premiums on the first $_________ of coverage paid for by
your employer
50,000
Is unemployment compensation taxable in full?
yes
What percent of social security benefits are taxable?
85%
True or False - Gross income must have as its source services income or earnings from property
False
True or False - ABC, Inc. recognizes $100,000 of income due to appreciation, but not sale, of Trading
Securities in its financial statements prepared according to GAAP. ABC must also recognize $100,000 of
gross income on its tax return.
False
True or False - Unemployment compensation is Excluded from gross income.
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False
True or False - Interest will generally not be imputed for loans of $10,000 or less between individuals.
True
Describe the Entity Concept
Every legal entity must keep its own separate records, file separate tax returns and pay its own tax. As
long as the purpose is the equivalent of business activity OR is followed by the carrying of a business by
the corporation, the corporation remains a separate taxable entity
Describe the Arms-Length Transaction Doctrine
When related parties engage in transactions, the terms of the transaction must be the same as they
would be if the parties were not related
Describe the Economic Substance Doctrine
A transaction has economic substance if the transaction changes in a meaningful way the taxpayer's
economic position and the taxpayer has a substantial purpose for entering into the transaction
True or False - Anytime a taxpayer receives anything of value, the taxpayer will be presumed to have
additional gross income.
True
Are gifts and inheritances included in gross income?
No
Are transfers by employers to employees excludable gifts?
No; it's considered additional compensation, not a gift
True or False - Although gifts are not included in gross income, inheritances are included in gross
income.
False
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Related Questions

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(Points : 3) Liabilities Assets stockholders%u2019 equity Expenses12. A&M Co. provided services of $1,000,000 to clients on account. How does this transaction affect A&M%u2019s accounts? (Points : 3) Increase accounts receivable and cash by $1,000,000 each Increase accounts receivable and revenues by $1,000,000 each Increase accounts receivable and unearned revenues by $1,000,000 each No effect at this time13. Multiple-step income statements show: (Points : 3) gross profit but not income from operations. neither gross profit nor income from operations. both gross profit and income from operations. income from operations but not gross profit.14. Since merchandise inventory is normally sold within a year, how is it reported on the balance sheet? (Points : 3) As a revenue As the cost of merchandise sold It does not appear on the Balance Sheet As a current asset15. The credit terms of a sale are normally indicated on a(n) (Points : 3) purchase order. invoice. bill of lading. account receivable.16. Inventory shortage is recorded when (Points : 3) merchandise is returned by a buyer. merchandise purchased from a seller is incomplete or short. merchandise is returned to a seller. there is a difference between a physical count of inventory and inventory records. 17. The bank reconciliation (Points : 3) should be prepared by an employee who records cash transactions. is part of the internal control system. is for information purposes only. is sent to the bank for verification.18. A special cash fund used to make small payments that occur frequently is called a(n) (Points : 3) operating expenses fund. change fund. market fund. petty cash fund.19. 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Gross earnings for a payroll period less payroll deductions are referred to as (Points : 3) overtime pay. bonus pay. gross pay. net pay.31. How is treasury stock shown on the balance sheet? (Points : 3) As an asset As a decrease in stockholders' equity As an increase in stockholders' equity Treasury stock is not shown on the balance sheet.32. Current liabilities are (Points : 3) due but not receivable for more than one year. due but not payable for more than one year. due and receivable within one year. due and payable within one year.33. The total earnings of an employee for a payroll period are referred to as (Points : 3) take-home pay. pay net of taxes. net pay. gross pay.34. Where is interest expense listed on the income statement? (Points : 3) Other expense section Cost of merchandise sold Operating expenses Interest expense is on the balance sheet, not the income statement.35. A corporation has 50,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be (Points : 3) 200,000 shares. 50,000 shares. 250,000 shares. 12,500 shares.

1.( T or F ) An individual who directly owns real estate andearns net rental income for the tax year January 1 – December 31,2018 will have an effective tax rate of 29.6% on it.

2.( T or F ) Jumbo LLC, is treated as a partnership and is ownedby 50% by two individuals, Rod and Tom. Jumbo LLC acquired BighornCenter, an industrial rental property for $2 million and collectsrent from tenants. When Bighorn Center’s value increases to $3million, Jumbo refinances the debt and distributes $500,000 to bothRod and Tom. Rod and Tom treat the $500,000 as ordinary incomesubject to a 39.6% tax rate.

3.( T or F ) A gain resulting from the sale of REIT shares whenthat REIT is domestically controlled will not result in any U.S.federal income tax withholding for non-U.S. holders of the REITstock.

4.( T or F ) A general partnership can be taxed as a corporationif so elected under the check the box rules.

5.( T or F ) An individual investor can own 100% of a REIT.

6.( T or F ) Since dividends are not UBTI, a tax exempt investorwill not have UBTI on dividend income when debt is used to purchasethe stock that paid the dividend.

7.(T or F) An individual, who qualifies as a real estateprofessional, can treat a particular rental real estate activity asnon-passive even when that individual does not materiallyparticipate in the real estate activity.

8.(T or F) Withholding tax to non-US investors on interestincome and dividends may be reduced under the terms of atreaty.

9. Assume a building, owned by a REIT, increases invalue and the REIT that owns it sells the building for $120 millionand then makes a capital gain distribution to its shareholders.Which of the following is true regarding a U.S. individualinvestor's tax treatment:

A. The gain on the sale will be taxed at the ordinary income taxrate.

B. The gain on the sale will be taxed at the capital gain taxrate.

C. There is no tax on the net gain at the shareholder level.

D. The tax treatment is the same for the US investor as it isfor the foreign investor.

E. None of the above.

11. Provide the tax that would be applied for each ofthe following:

1. Withholding tax on passive-typeincome (interest, dividends, etc..) for non-US investors withrespect to US source income. _______________.

2. Tax imposed on a foreigncorporation based on a deemed distribution of US branchoperations____________________.

3. Withholding tax on US businessincome income that is effectively connected with a United Statestrade or business. ______________.

13. Which of the following would cause the largestproblem for an individual who wants to be taxed as a real estateprofessional (which one would be the most difficult to overcome ifan individual wanted to be treated as a real estateprofessional)?

A. The individual owns only rental real estate properties andspends all of his/her time managing them.
B. The individual works for herself as a commissioned real estatebroker and invests in one rental property on the side.

C. The individual works full time for a company that is activein a real estate trade or business (periodically requiringovertime) but has no ownership in the company.

D. The individual owns and operates a hotel where she spends2,000 hours per year and she also invests in a small portfolio ofrental real estate properties.

E. None of the above would cause problems for an individual tobe classified as a real estate professional.

14. What are the highest tax rates for each of thefollowing scenarios?

____. Operating income from a hotel earned by a foreigncorporation (excluding branch profits tax)

____. Interest income earned by a foreign corporationfrom a US borrower

____. Net rental income earned by an U.S. individual(exclude the passthrough deduction)

____. Capital gain earned by an U.S.individual

____. Interest income earned by a U.S.corporation

____. Capital gain earned by an U.S.corporation

____. Depreciation recapture on the sale of U.S. realestate (Section 1250 property) for an individual

____. Depreciation recapture on the sale of U.S. realestate (Section 1245 property) for an individual

15. Identify the following as "ECI" (effectivelyconnected income) or "Not ECI" (not effectively connected income)if earned by a foreign person:

________Rental income from an actively managed storage center inFlorida

________ Interest income from loans to non-U.S. corporateborrowers.

________ A gain on the sale of a shopping center located inBermuda.


35.A corporation has 50,000 shares of $100 par value stockoutstanding. If the corporation issues a 4-for-1 stock split, thenumber of shares outstanding after the split will be (Points :3)
200,000 shares.
50,000 shares.
250,000 shares.
12,500 shares.