Reference no: EM131822115

Assignment

Problem 1

1 Ann will not include the $2000 in her gross income. This is because the amount was compensation for what was lost and thus meant to restore her to the position she was before the car was stolen.

2 The $3000 is not added to Barry's gross income because he did not earn any money but rather recovered the money he had loaned out.

3 Cheryl's accounting would not make any difference if the tax work she did and the subsequent collection were performed in the same year. However, if she did her work in the year 2013 and sue to collect in 2014, he accounting method would make a difference.

4 None of the expenses incurred by Darryl should be included in his gross income. This is because he never received any income.

Problem 2

1 Frank should include the prize money of $6000 in his gross income. This is because it is greater than $600 hence taxable.

2 George will include the amount in his gross income because he received the $600 as a result of his idea that reduced employer's production costs.

3 Hellen should not include the $700 in her gross income. This is because she never made a profit from the loan and also it was from a family member hence it was a gift in kind.

Problem 3

1 The first $ 20000 will be tax free and thus will not be reported in the gross income. The other $5000 will be reported as ordinary income hence added to the gross income.

2 Diane will not pay income tax on the face amount of the policy ($50000). This will thus not be added in her gross income.

3 If Diane elects to receive $20000 over the period of four years, the interest portion of the instalment will be taxable at ordinary income rates and thus the installment interest will be added to her gross income.