Question

Problem 5-33 (LO. 2)

Sally was an all-state soccer player during her junior and senior years in high school. She accepted an athletic scholarship from State University. The scholarship provided the following:

Tuition and fees $15,000 Housing and meals $6,000 Books and supplies $1,500 Transportation $1,200

a. Determine the effect of the scholarship on Sally's gross income.

Included in/Excluded from Income Tuition and fees Housing and meals Books and supplies Transportation

b. Sally's brother, Willy, was not a gifted athlete, but he received $8,000 from their father's employer as a scholarship during the year. The employer grants the children of all executives a scholarship equal to one-half of annual tuition, fees, books, and supplies. Willy also received a $6,000 scholarship (to be used for tuition) as the winner of an essay contest related to bioengineering, his intended field of study. Indicate whether the following statements are "True" or "False" regarding the effect of the scholarships on Willy's and his father's gross income.

• The $8,000 scholarship is additional compensation to Willy's father and is included in his gross income. • The scholarship is simply a payment to assist children of employees seeking an education and so is excluded from Willy's father's gross income. • The $6,000 scholarship is taxable to Willy since he received it as a result of a contest.

Answer 1

a. An educational institution may provide a student cash benefits like gifts or scholarships or compensate for providing teaching or research assistant services. The athletic scholarship is not considered as a compensation for services provided but the cash benefits received for housing, meals and transportation are included in gross income computation but scholarship benefits for tuition and fee, books and supplies will be excluded from gross income.

Cash benefits included in gross income

Particulars	Amount
Housing and meals	$6,000
Transportation	$1,200
Total gross income	$7,200

Cash benefits excluded from gross income

Particulars	Amount
Tuition and fees	$15,000
Books and supplies	$1,500
Excluded from gross income	$16,500

b.

1. "True" $8,000 scholarship received from his father’s employer is considered as additional compensation to his father as the employer gives this grant to the children of all executives.
2. "False" the employer is simply compensating the employees in the garb of scholarship to athletes.
3. "False" prize money in the form of scholarships are not taxable.