COMPREHENSIV PROBLEM-Gross Income and Exclusions CH 5

Comprehensive Problems
73. [LO 1, LO 2, LO3] Charlie was hired by Ajax this year as a
corporate executive and a member of the board of directors. During the current year, Charlie received the
following payments or benefits paid on his behalf.
Salary payments $ 92,000
Contributions to qualified pension
plan 10,200
Qualified health insurance premiums 8,400
Year-end bonus 15,000
Annual director’s fee 10,000
Group-term life insurance premiums
(face=$40,000) 750
Whole life insurance premiums
(face=$100,000) 1,420
Disability insurance premiums (no
special elections) 4,350
a. Charlie uses the cash method and calendar
year for tax purposes. Calculate
Charlie’s gross income for the current year.
b. Suppose that Ajax agrees to pay Charlie an additional
$100,000 once Charlie completes five years of employment. Will this agreement alter Charlie’s gross
income this year relative to your part (a) answer? Explain.

c. Suppose that in exchange for his promise
to remain with the firm for the next four years, Ajax paid Charlie four years of director’s
fees in advance. Will this arrangement
alter Charlie’s gross income this year relative to your part (a) answer? Explain.
d. Assume that in lieu of a year-end bonus Ajax transferred 500 shares of Bell stock to Charlie as compensation. Further assume that the stock was listed at
$35 per share and Charlie would sell the shares by year-end, at which time he
expected the price to be $37 per share.
Will this arrangement alter Charlie’s gross income this year relative to
your part (a) answer? Explain.
e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house
payments (a total of $23,000). Will this
arrangement alter Charlie’s gross income this year relative to your part (a)
answer? Explain.
74. [LO 1, LO 2, LO3] Irene is disabled and receives payments from a
number of sources (see below). The
interest payments are from bonds that Irene purchased over past years and a
disability insurance policy that Irene purchased herself. Calculate Irene’s gross income.
Interest, bonds issued by City of Austin,
Texas $ 2,000
Social Security benefits 8,200
Interest, U.S. Treasury bills 1,300
Interest, bonds issued by Ford Motor
Company 1,500
Interest, bonds issued by City of
Quebec, Canada 750
Disability insurance benefits 19,500
Distributions from qualified pension
plan 5,400

75. {Tax Forms} [LO1, LO 2,
LO3] Ken
is 63 years old and unmarried. He
retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very
active. Ken reported the following
financial information this year. Assume
Ken files as a single taxpayer.
Determine Ken’s gross income and complete page 1 of Form 1040 for Ken.
a. Ken
won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is
illegal).
b. Ken
sold 1,000 shares of stock for $32 a share.
He inherited the stock two years ago.
His tax basis (or investment) in the stock was $31 per share.
c. Ken
received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually
for 20 years, for $210,000.
d. Ken
received $13,000 in disability benefits for the year. He purchased the disability insurance policy
last year.

e. Ken
decided to go back to school to learn about European history. He received a $500 cash scholarship to
attend. He used $300 to pay for his
books and tuition, and he applied the rest toward his new car payment.
f. Ken’s
son, Mike, instructed his employer to make half of his final paycheck of the
year payable to Ken. Ken received the
check on December 30 in the amount of $1,100.
g. Ken
received a $610 refund of the $3,600 in state income taxes his employer
withheld from his pay last year. Ken
claimed $6,150 in itemized deductions last year (the standard deduction for a
single filer was 6,100).
h. Ken
received $30,000 of interest from corporate bonds and money market accounts.

76. {Tax Forms} [LO 1,
LO 2, LO 3]
Consider the following letter and answer Shady’s question.
To my friendly student tax
preparer:
Hello,
my name is Shady Slim. I understand you are going to help me figure out my
gross income for the year…whatever that means. It’s been a busy year and I’m a
busy man, so let me give you the lowdown on my life and you can do your thing.
I
was unemployed at the beginning of the year and got $2,000 in unemployment
compensation. I later got a job as a manager for Roca Cola. I earned $55,000 in
base salary this year. My boss gave me a $5,000 Christmas bonus check on
December 22. I decided to hold on to that check and not cash it until next
year, so I won’t have to pay taxes on it this year. Pretty smart, huh? My job’s pretty cool. I get a lot of fringe
benefits like a membership to the gym that costs $400 a year and all the Roca
Cola I can drink, although I can’t really drink a whole lot. As part of my manager duties, I get to decide
on certain things like contracts for the company. My good buddy, Eddie, runs a
bottling company. I made sure that he won the bottling contract for Roca Cola
for this year (even though his contract wasn’t quite the best). Eddie bought me
a Corvette this year for being such a good friend. The Corvette cost $50,000
and he bought it for me out of the goodness of his own heart. What a great guy!
Here’s
a bit of good luck for the year. Upon leaving my office one day, I found $8,000
lying in the street! Well, one person’s
bad luck is my good luck, right?
I
like to gamble a lot. I won a $22,000 poker tournament in Las Vegas this year. I also won about $5,000
over the year playing the guys at our Friday night poker game. Can you believe
that I didn’t lose anything this year?
Speaking
of the guys, one of them hit me with his car as we were leaving the game one
night. He must have been pretty ticked that he lost! I broke my right leg and my left arm. I sued
the guy and got $11,000 for my medical expenses, $3,000 to pay my
psychotherapist for the emotional problems I had relating to the injuries (I
got really depressed!), and I won $12,000 in punitive damages. That’ll teach
him that he’s not so tough without his car!
Another
bit of bad luck. My uncle Monty died this year. I really liked the guy, but the
$200,000 inheritance I received from him made me feel a little better about the
loss. I did the smart thing with the money and invested it in stocks and bonds
and socked a little into my savings account. As a result, I received $600 in
dividends from the stock, $200 in interest from the municipal bonds, and $300
in interest from my savings account.
My
ex-wife, Alice, is still paying me alimony. She’s a lawyer who divorced me a
few years ago because I was “unethical” or something like that. Since she was
making so much money and I was unemployed at the time, the judge ruled that she
had to pay ME alimony. Isn’t that something?
She sent me $3,000 in alimony payments this year. She still kind of
likes me, though. She sent me a check for $500 as a Christmas gift this year. I
didn’t get her anything, though.
So there you go. That’s the year in a nutshell.
Can you figure out my gross income and complete page 1 of Form 1040 for
me? And since you’re a student, this is
free, right? Thanks, I owe you one! Let me know if I can get you a six-pack of
Roca Cola or something.

77. {Tax Forms} [LO 1,LO 2,
LO 3]
Diana and Ryan Workman were married on January 1 of last year. Diana has an eight-year-old son, Jorge, from
her previous marriage. Ryan works as a
computer programmer at Datafile Inc. (DI) earning a salary of $96,000. Diana is self-employed and runs a day care
center. The Workmans reported the
following financial information pertaining to their activities during the
current year.
a. Ryan
earned a $96,000 salary for the year.
b. Ryan
borrowed $12,000 from DI to purchase a car.
DI charged him 2 percent interest on the loan, which Ryan paid on
December 31, but would have charged Ryan $720 if interest was calculated at the
applicable federal interest rate. Assume that tax avoidance was not a motive
for the loan.
c. Diana
received $2,000 in alimony and $4,500 in child support payments from her former
husband.
d. Diana
won a $900 cash prize at her church-sponsored Bingo game.
e. The
Workmans received $500 of interest from corporate bonds and $250 of interest
from a municipal bond. Diana owned these
bonds before she married Ryan.
f. The couple bought 50 shares of ABC Inc. stock for $40 per share on July 2. The stock was worth $47 a share on December
31. The stock paid a dividend of $1.00
per share on December 1.
g. Diana’s father passed away on April 14. She inherited cash of $50,000 and his
baseball card collection, valued at $2,000.
As beneficiary of her father’s life insurance policy, Diana also
received $150,000.
h. The couple spent a weekend in Atlantic City in November
and came home with gambling winnings of $1,200.
i. Ryan received $400 cash for reaching 10
years of continuous service at DI.
j. Ryan was hit and injured by a drunk
driver while crossing a street at a crosswalk.
He was unable to work for a month.
He received $6,000 from his disability insurance. DI paid the premiums for Ryan but they
reported the amount of the premiums as compensation to Ryan on his year-end
W-2.
k. The drunk driver who hit Ryan in part (j)
was required to pay his $2,000 medical costs, $1,500 for the emotional trauma
he suffered from the accident, and $5,000 for punitive damages.
l. For meeting his performance goals this
year, Ryan was informed on December 27 that he would receive a $5,000 year-end
bonus. DI (located in Houston, Texas)
mailed Ryan’s bonus check from its payroll processing center (Tampa, Florida)
on December 28th. Ryan didn’t receive the check at his home until
January 2.
m. Diana is a 10 percent owner of MNO Inc., a
Subchapter S corporation. The company
reported ordinary business income for the year of $92,000. Diana acquired the MNO stock last year.
n. Diana’s daycare business collected $35,000
in revenues. In addition, customers owed
her $3,000 at year-end. During the year,
Diana spent $5,500 for supplies, $1,500 for utilities, $15,000 for rent, and
$500 for miscellaneous expenses. One
customer gave her use of his vacation home for a week (worth $2,500) in
exchange for Diana allowing his child to attend the day care center free of
charge. Diana accounts for her business
activities using the cash method of accounting.
o. Ryan’s employer pays the couple’s annual
health insurance premiums of $5,500 for a qualified plan.
Required:
A. Assuming the Workmans file a joint tax
return, determine their gross income.

B.
Using your answer in part A, complete page 1 of Form 1040 through line 22 for
the Workmans.

Diane & Ryan Workman
Form 1040, Line 21
Detail Schedule

Cash Prize

900

Gambling Winnings

1,200

Punitive Damages

5,000

Line 21 Income $7,100

C. Assuming the Workmans live in California, a community
property state, and that Diana and Ryan file separately, what is Ryan’s gross
income?
Ryan Workman
Form 1040, Line 21
Detail Schedule

Cash Prize

450

Gambling Winnings

600

Punitive Damages

2,500

Line 21 Income $3,550