22 Jun QuestionSM Ch05 Ch05 DISCUSSION QUESTIONS
QuestionSM Ch05
Ch05 DISCUSSION QUESTIONS
1. LO.2 Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income? Explain.
2. LO.2 Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer: To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage.
Based on the preceding information, how much is Leonard required to include in his gross income?
3. LO.1, 2 Twenty college fraternity brothers each placed $2,500 in a mutual fund account.
They agreed that upon the death of a fraternity brother, his beneficiary would receive $20,000 that was to be paid from the mutual fund account. The beneficiary of the last remaining fraternity brother would receive the balance remaining in the account. The mutual fund did very well. Earl was the last to die, at age 92, and his beneficiary received $250,000. Can the $250,000 be excluded from the beneficiary’s gross income? Why or why not?
4. LO.2 Janice was a cash basis taxpayer. At the time of her death, she was owed $100,000 in accrued salary. Upon Janice’s death, the employer was required to pay Wayne, Janice’s brother, her accrued salary. Janice was a key employee, and her employer had purchased a $1,000,000 insurance policy on her life, with the proceeds payable to the employer. Her employer had paid $300,000 in premiums when it collected the face amount of the policy.
What amount must be included in the gross income of Janice, Wayne, and Janice’s employer?
5. LO.2 Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly abided with the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt.
Dolly gave the cashier $8 and pocketed the $100 bill. Dolly concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Dolly’s prompt service. Dolly thinks that a $2 tip would be sufficient and that the other $98 is like “found money.” How much should Dolly include in her gross income?
6. LO.2 Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers are not required to tip the waiter. Carey is especially attentive and friendly, and her tips average 25% of the restaurant charges. Is Carey required to include any of her tips in gross income when the customer has no legal obligation to make the payment?
Explain the basis for your conclusion.
7. LO.2 Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at the time of the customer’s death. In 2012, Lime wrote off as uncollectible a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2013, the life insurance policy was still in force and Lime received $3,500. Is the $3,500 of life insurance proceeds received by Lime included in its gross income? Explain.
8. LO.2 Sarah, who has a terminal illness, cashed in her life insurance policy (cost of $24,000 and proceeds of $50,000) to go on an around-the-world cruise. Ed paid $24,000 of life insurance premiums before cashing in his life insurance policy for the $50,000 cash surrender value. He decided he could invest the money and earn a higher rate of return. Tom’s wife died, and Tom collected $50,000 as the beneficiary on a group term life insurance policy purchased by her employer. Determine the amounts that Sarah,
Ed, and Tom should include in their gross income.
9. LO.2 Joe is a graduate student who works as a resident adviser (RA) in the college dormitory.
As compensation for serving as an RA, he is not charged the $2,200 other students pay for their dormitory rooms for the fall 2013 semester. As an RA, he is required to live in the dormitory. He is also paid $1,500 for being available to dormitory residents at all hours during the fall semester. Joe also has a scholarship that pays him $12,000 to be used for his tuition for the academic year. He uses the scholarship proceeds to pay $6,000 of tuition in August 2013. In January 2014, he pays $6,000 for his spring semester tuition. What is Joe’s gross income for 2013?
10. LO.2 Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and
$50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain.
11. LO.2 Wes was a major league baseball pitcher who earned $10 million for his 20 wins this year. Sam was also a major league baseball pitcher before a career-ending injury caused by a negligent driver. Sam sued the driver and collected $6 million as compensation for lost estimated future income as a pitcher and $4 million as punitive damages. Do the amounts that
Wes and Sam receive have the same effect on their gross income? Explain.
12. LO.2 Holly was injured while working in a factory and received $12,000 as workers’ compensation while she was unable to work because of the injury. Jill, who was selfemployed, was also injured and unable to work. Jill collected $12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work.
How much are Holly and Jill each required to include in their gross income?
13. LO.2 Melba’s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2013, but by the end of December 2013, she still had $300 remaining in the accou
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