Reference no: EM13846613

Problem 1. Carl Hansen had the following transactions during 2015:

Salary		$68,000
Interest income on bonds-
Issued by Kellogg's Corporation	$3,500
Issued by the city of Midland, MI	1,000	4,500
Alimony received		7,000
Child support received		12,000
State income taxes paid		4,800
Bank loan obtained to buy a car		23,000

Problem 2. Barry Bad had the following transactions for 2015:

Salary		$  47,300
Moving expenses incurred to change jobs		6,000
Gift from dad		14,000
Life insurance proceeds from policy on grandma's life (Barry was      named the beneficiary)		80,000
Gambling winnings		3,240
Donations to GoodWill		450

Problem 3. Hiram, age 14, is claimed as a dependent by his mother. In 2015, Hiram has dividend income of $1,000 and earns $550 from a part-time job.

a. What is Hiram's taxable income for 2015?

b. Suppose Hiram earned $6,000 (not $550) from the part-time job and has dividend income of $1,000. What is Hiram's taxable income for 2015?

c. Suppose Hiram's dividend interest is $5,900 and he earns $1,000 from the part-time job. Hiram's parents have $93,000 taxable income and a MTR of 25%. What is Hiram's taxable income for 2015? What are his parents' income? (optional but know the principle at work)

Problem 4. Ethel, age 79, is a widow. Her daughter claims her as a dependent. In 2015, she had income as follows: $5,500 interest on municipal's; $8,200 Social Security benefits; $2,000 income from a part-time job; and $1,920 dividends on stock investments. What is Ethel's taxable income for 2015?

Problem 5. Stan (age 66) and his wife Betty (age 68) file jointly. Emmitt (Betty's 92-year old father) lives with them. Betty is blind. In 2015, they received $10,000 of Tallahassee bonds and interest income on corporate bonds of $61,000. Compute Stan and Betty's taxable income for 2015.

Problem 6. Susie Q is a cash-basis taxpayer, is a partner in S & P Accounting Services. As part of the partnership agreement, Susie Q is to receive 35% of the partnership's profits or losses. The partners may each make withdrawals of $9,000 each month for living expenses. Susie Q withdrew $99,000 during the year as her monthly draw in 2015. In April 2015, Susie Q received $30,000 as her share of distributed 2014 profits. In October the partnership fell short on cash so Susie Q as her other partners was required to invest an additional $15,000 in the partnership. The partnership earnings before partners' withdrawals for 2015 totaled $900,000. Compute Susie Q's gross income from the partnership for 2015.

Problem 7. Ashley made a $60,000 interest-free loan to her daughter, Chloe, who used the money to pay off her credit card debt and to buy a CD. Chloe earns a $29,000 salary and $2,100 interest income on the certificate of deposit. The relevant Federal interest rate is 7% compounded semiannually. The loan is outstanding for the entire year.

a. Based on the above information, what is the effect of the loan on Ashley's gross income for the year?

b. The facts are the same as above, except you discovered that Ashley had made an additional loan of $42,000 to Chloe. Chloe used the funds to buy a new Honda. What are the effects of the loans on Ashley's gross income?

Problem 8. Duane, a widower, has retired. His income consists of $26,000 tax-exempt interest income and $9,000 in Social Security benefits. Duane wonders if he should sell a stock at a $7,000 gain. What will be the increase in Duane's gross income as a result of the sale of the stock? (optional but know the principle at work)

Problem 9. Pat purchased a CD due in 36 months. The cost of the CD is $840 and its maturity value is $1,000. No interest is paid each year, but the interest rate on the CD is 7.5% compounded semiannually. Pat also purchased a Series EE United States Government bond for $558, with a maturity value in 10 years of $1,000. This is the only Series EE bond he has ever owned. The Series EE bond's yield is 6% interest. Pat is 11 years old, has no other income and is claimed as a dependent on his parent's return. What is Pat's gross income from the CD and Series EE bond for 2015.

Problem 10. Louise died during the current year. At the time of her death, her accrued salary and commissions totaled $5,000 and were paid to her husband, Don. The employer also paid Don $40,000, which represented a gift to the deceased family. The employer had a written policy of making the salary payments to "help out the family in the time of its greatest need." Don collected Louise's interest in the employer's qualified profit sharing plan that amounted to $50,000. As beneficiary of his wife's life insurance policy, Don elected to collect the proceeds in installments rather than a lump sum. In the year of her death, he collected $10,000 which included $1,800 interest income. Which of these items are subject to income tax for Don?

Problem 11. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement:

Damages for 25% loss of the use of her right arm	$200,000
Medical expenses	30,000
Loss of wages	10,000
Punitive damages	100,000
	$340,000

The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what
she considers to be her actual damages (listed above)?

Problem 12. Jacob is employed by the Whirltub Company. All the full time employees are allowed to purchase appliances at the company's cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. Jacob H. purchased a refrigerator for $1075. The company's normal selling price for the refrigerator is $1500; gross profit rate is 33%. Jacob also received a service contract, at no charge, that had a value of $200. During the year, Jacob was required to have his refrigerator serviced once. The cost of the call would have been $90 if he had not had the service contract. Is Jacob required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

Problem 13. Paul, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate of the fund is 6%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 9%. Paul itemizes his deductions on his Federal income tax return. As an alternative, Paul can purchase a state bond (a "double-exempt bond") yielding 5.8% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return?

Problem 14. Sam incurs and pays the following expenses during the year:

• Alimony of $10,000 to her former spouse, John.
• Child support of $13,000 to John for the care of their children.
• Medical expenses of $8,000 for herself.
• Charitable contributions of $5,100 to her church.
• Contribution to her traditional IRA of $5,500.
• Mortgage interest on her residence of $9,500.
• Property taxes on her residence of $2,300.
• State general sales tax of $836.
• State income taxes for herself of $3,500.

Sam's only income is a $90,000 salary. Calculate Sam's deductions for AGI and from AGI.

Problem 15. Mr. Tipper owns the Tipper agency. The following selected data are taken from the business' balance sheet and income statement prepared using the accrual method.

Revenue	$300,000
Salaries and commissions	150,000
Rent	8,000
Insurance	7,000
Utilities	5,000
Accounts receivable, 1/1/2015	42,000
Accounts receivable, 12/31/2015	35,000
Accounts payable, 1/1/2015	15,000
Accounts payable, 12/31/2015	13,000

Calculate Mr Tipper's net profit using the cash method for 2015.

Problem 16. Juan signs a 36-month lease for $36,000 in order to protect against rent increases on the building in which he operates a fitness center. The lease commences on September 1, 2015. How much of the $36,000 payment can he deduct in 2015 and 2016?

a. If Juan is an accrual basis taxpayer?

b. If Juan is a cash basis taxpayer?

Problem 17. Madame Thoroughbred runs a bookie shop (illegal under state law) and has the following items of income and expense.

a. What is the amount that she must include in taxable income from her operation?

Income		$200,000
Expenses:
	Rent	8,000
	Utilities	2,000
	Bribes to police	10,000
	Medical expense	5,000
	Legal fees	20,000
	Depreciation	14,000
	Illegal kickbacks	15,000

b. What if the Madame ran a drug smuggling operation and her cost of goods sold was $25,000?

Problem 18. Larry owns a sporting goods store in Jackson. He is considering opening a business in RestWell, a community located 25 miles away. He incurs expenses of $72,000 in 2015 in investigating the feasibility and desirability of doing so. What amount can Larry deduct in 2015 if the business is:

a. Another sports store which he opens in November 2015?

b. Another sports store which he decides against opening?

c. A hardware store which he opens in November 2015?

d. A hardware store which he decides against opening?

Problem 19. Calculate Tim's net income includible in taxable income for the following hobby:

Income	$18,000
Mortgage interest and property taxes allocable to hobby	10,000
Depreciation	4,000
Supplies and fees	6,000
Telephone for hobby	1,500

If Tim is single has $45,000 in salary and no other income besides his hobby, what is his taxable income?

Problem 20. During the year, Honey rented her vacation home for 180 days and lived in it for 17 days. During the remaining days, the vacation home was available for rental use. All expenses have been allocated for the rental portion. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home? What is Honey's gross income?

Rental Income	$24,000
Allocated Mortgage Interest	8,500
Maintenance & repairs	1,750
Utilities	1,800
Depreciation	5,000
Property Tax allocation	6,900
Management fees	2,500

Problem  21. Joe's son, Ian, is $6,000 in arrears on his residential mortgage payments. Of the $6,000, $4,200 represents interest and $1,800 represents principal.

a. If Joe pays the $6,000 to the lender, how much can he deduct? How much can Ian deduct?

b. If Joe pays the $4,200 of interest to the lender and loans or gives $1,800 to Ian, who pays the $1,800 of principal, how much can Joe deduct? How much can Ian deduct?

c. If Joe gives or lends the $6,000 to Ian who pays the lender, how much can he deduct? How much can Ian deduct?

d. Advise Joe and Ian on how the payment should be made.

Problem  22. Derek sells land with an adjusted basis of $170,000 and a fair market value of $155,000 to his kid-sister, Aimee, for $155,000. Derek reinvests the proceeds in the stock market. Aimee holds the land for one year and a day and sells it in the marketplace for $164,000.(optional -know the principles behind the question)

a. Determine the tax consequences to Derek.

b. Determine the tax consequences to Aimee.

Problem  23. During 2015, Lucy has the following gains and losses:

a. What is Lucy's tax liability if she is in the 10% tax bracket?

b. What is Lucy's tax liability if her MTR = 33%?

Stock	Gain/Loss on sale
Jack Rabbit stock held 28 mos.	-8,500
GroFast stock held 7 mos	-10,500
Holstein stock held since 2004	13,000
Tromp Hotel stock held 3 mos	7,000

Problem  24. During 2015, Scott received the following dividends on her stock:

Stock	Dividend
Hopscotch Corp	50,000
Four Square Ltd	14,000
Hidenseek	20,000
Goatsgruff, a German company	17,000
Traded on the US securities mkt

a. Scott has held Hopscotch, Four Square and Goatsgruff stock for over 5 years. He purchased Hidenseek 45 days before it went ex-dividend and then sold it 75 days later at a $3,000 loss. Scott had no other gains or losses. He is in the 33% marginal tax bracket. What is his tax on his 2015 dividend income?

b. Scott has a friend Paul who is single and earns about $24,000 a year and received $4,500 in qualified dividends from Hopscotch. What is Paul's tax on his 2015 dividend income?

c. Scott wants your advice on whether he should invest $10,000 in a corporate bond which pays a before tax 6% interest rate or buy stock that yields a 5% dividend before tax. Paul would like the same analysis as well but only has $1,000 to invest.

Problem 25. Marlena is 60 years old and just retired from her company after 35 years of service. She contributed $68,200 in her company's qualified retirement plan and would now like to receive her retirement benefits as an annuity. The monthly Annuity payment is $3,500 for the remainder of her life.

a. What is her gross income from her annuity payments in the first year if she retires March 31, 2015?

b. What is her gross income from the annuity if she still living 28 years after retiring (the 27th year)?

c. What is her gross income and deductions from the annuity contract in the year of her death if she dies after receiving 254 payments and died on May 31st of that tax year?