Question

1. ) Earned and Unearned Income (LO. 2) Partha owns a qualified annuity that cost $52,000. Under the contract, when he reaches age 65, he will receive $500 per month until he dies. Partha turns 65 on June 1, 2018, and receives his first payment on June 3, 2018. Refer to the Annuity payment table to answer the following question. Partha will report gross income of $______ from the annuity payments in 2018.

****FACTS**** (^^^)

Age on Annuity Starting Date: 61-65= 260 payments 66-70= 210 payments

2.) Effect of Accounting Method (LO. 6)

Arlene is a lawyer. She begins the current year with $12,000 in accounts receivable from customers. During the year, she bills customers $210,000 in fees and receives $180,000 in payments on account. She writes off $8,000 of the receivables as uncollectible, leaving her a year-end receivable balance of $34,000.

a. Arlene will recognize $________ of cash receipts as her gross income if she uses the cash basis of accounting.

^^^Feedback: Cash basis taxpayers look for constructive receipt while accrual basis taxpayers look for when earned.

b. Arlene's gross income would be $________ if she uses the accrual basis of accounting.

3.) Effect of Accounting Method (LO. 6)

During the last five months of the year, Dwana opens a new internet telecommunications business called Dwan-Com. Dwan-Com bills $50,000 of revenues, but receives only $40,000 cash. Dwan-Com incurs $3,000 of supply expenses, and $41,000 of labor costs. Dwan-Com pays for $2,200 of the supplies and $38,000 of the labor costs in the current year.

a. Under the cash method, Dwan-Com has a net loss of $_______.

b. Dwan-Com's taxable income under the accrual method is $_________.

Answer 1

Part 1

Partha will report gross income of $2100 from the annuity payments in 2018.

Explanation :

Partha is age 65 and so number of payments = 260 months

monthly exclusion = $200 ($52,000 * 260 months)

Taxable amount = 500-200= $300

Gross income = $2,100 ($300 x 7 payments)

Part 2 A

Arlene will recognize $180,000 of cash receipts as her gross income if she uses the cash basis of accounting.

Explanation :

Cash basis taxpayers recognize income as it is received. Therefore, Arlene will recognize the $180,000 of cash receipts as her gross income on the cash basis. Her write-off of uncollectible accounts does not affect her gross income because she is on the cash basis and none of the receivables written off would have been previously included in income.

Part 2 B

Arlene's gross income would be $210,000 if she uses the accrual basis of accounting.

Explanation :

Accrual basis taxpayers recognize income as it is earned. Arlene must include the $210,000 she billed her customers as her gross income. The write off of the receivables is not a reduction of her gross income. However, she is allowed a bad debt deduction for the $8,000 of bad accounts.

Part 3 A

Under the cash method, Dwan-Com has a net loss of $200:

Cash received........................... $ 40,000

Labor.......... $ 38,000

Supplies........2,200

Total Cash Payments............. .. (40,200)

Taxable loss...................... ........ $ (200)

Part 3 B

Dwan-Com’s taxable income under the accrual method is $6,000

Explanation :

Services Billed................. $ 50,000

Labor........ $ 41,000

Supplies........3,000

Total expenses................ (44,000)

Taxable income........... ... $ 6,000