Ea Exam part 1 section 2 UPDATED ACTUAL
Questions and CORRECT Answers
During the current year, Dave, a member of the clergy, received a salary of $14,000 and a house with a fair rental value of
$6,000 as pay for his duties as an ordained minister. Dave also was employed part-time as a limousine driver receiving a
salary of $3,000, tips of $1,000, and a Christmas bonus of $200. Dave became disabled in November and received $2,800
as a disability pension. He made no contributions to the pension. What amount must Dave include in gross income on his
current-year tax return?
A. $21,000
B.$26,800
C.$18,200
D.$27,000 - CORRECT ANSWER A.$21,000Answer
Under Sec. 61, salaries and fees for personal services are always included in gross income. A minister should include his
or her salary; the offerings given directly to him or her for marriages, baptisms, and funerals; tips; cash bonuses; and
pension benefits, when no personal contributions were made to the pension fund. Regulation 1.107-1 excludes from gross
income the rental value of a home, including utilities, furnished to a minister as a part of his or her compensation
(Publication 517). Dave must includeSalary$14,000Outside earnings3,000Tips1,000Bonus200Pension2,800Total$21,000
In Year 1, Lee was beginning his undergraduate education. In January of Year 1, Lee was awarded a scholarship of $500
per month from a tax-exempt educational foundation to continue as long as Lee was a full-time student until he received
his degree. Lee remained a full-time student and graduated at the end of August of Year 5. Lee received the scholarship
each month from January of Year 5 through August of Year 5, and spent $2,400 for tuition, fees, books, and supplies.
How much must Lee include in gross income from the scholarship in Year 5?
A.$1,600
B.$0
C.$2,400
D.$4,000 - CORRECT ANSWER A.$1,600Answer
candidate for a degree may exclude the amount received as a scholarship at an educational organization. There is no limit
on the time for which the scholarship may be received. Only amounts actually used for tuition, course-related fees, books,
supplies, and equipment required for instruction qualifies for this exclusion (Publication 17). Therefore, Lee needs to
include $1,600 in gross income from the scholarship as calculated below. Monthly payment$ 500 Times: Number of
payments× 8 Amount received$4,000 Less: Qualified expenditures(2,400)Gross income inclusion$1,600
William owns a four-unit apartment building for which he receives $500 per month per unit. Three of the units were
rented for the entire 12 months. The fourth unit was occupied from January 1 to April 30, Year 1. Upon vacating the unit,
the tenant was not refunded his security deposit of $500 due to damage to the unit. The unit was subsequently rented for 1
year beginning August 1, Year 1. On August 1, Year 1, the new tenant paid the first and last months' rent and a refundable
security deposit of $500. What is William's rental income for Year 1?
A.$23,000
B.$23,500
C.$22,500
D.$24,000 - CORRECT ANSWER B.$23,500Answer
All amounts received or accrued as rents are includible in income. Security deposits are income if and when the lessor
becomes entitled to the funds by reason of the lessee's violation of the terms of the lease. Advance rent received upon
execution of a lease is includible in gross income in the year received, whether the taxpayer is on the cash or the accrual
basis. For the current year, William must include $18,000 for the three units rented continuously during the year.
Although not specifically stated, it is presumed that William received rental income of $2,000 from unit four while it was
occupied for the first 4 months of the current year. The $500 security deposit of the first tenant in unit four is includible as
rental income because William became entitled to the funds to repair damages to the unit after the tenant vacated it.
William also received rental income of $3,000, which included $500 of prepaid rent, from the second tenant of unit four.
The refundable security deposit of $500 paid by the second tenant of unit four is not part of William's rental income for
the current year because William was not authorized to retain any portion of the deposit during the year (Publication 17).
, Fred received the following from his employer during the year: $25,000 regular wages, $5,000 cash bonus, trip valued at
$1,000, and parking valued at $100 per month at a lot adjacent to the office building. His employer contributed $200 per
month to a 401(k) plan for Fred. Fred chose not to set aside any of his pay for the retirement plan. How much income
should Fred report?
A.$31,000
B.$34,600
C.$33,400
D.$32,200 - CORRECT ANSWER A.$31,000
Publication 17 states that compensation for personal services, no matter what form of payment, must be included in gross
income. Wages, bonuses, and fringe benefits that do not qualify for exclusions are some examples of items included.
Parking is specifically listed as a qualified transportation fringe benefit under Sec. 132(f)(1) and (2). The $5,000 cash
bonus and the trip are included in his income; however, contributions to a 401(k), subject to a limitation that Fred does
not surpass, are not included. Therefore, his income is $31,000 ($25,000 regular wages + $5,000 cash bonus + $1,000 trip
value).
Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on
her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan
include in her gross income in connection with this award?
A.$0
B.$5,000
C.$10,000
D.$4,000 - CORRECT ANSWER C.$10,000Answer
Prizes and awards made primarily in recognition of charitable, scientific, educational, etc., achievement are excluded
from gross income only if the recipient was selected without any action on his or her part, is not required to render
substantial future services as a condition of receiving the prize or award, and assigns it to charity (Publication 17). Thus,
Joan cannot exclude any amount of the $10,000 award from gross income since she failed to assign it to charity.
Derek Dunn received three employee achievement awards during the year: a nonqualified plan award of a watch that cost
$250, two qualified plan awards of a computer that cost $1,500, and a radio that cost $400. The requirements for qualified
plan awards are satisfied. What amount, if any, must Derek include in income?
A.$550
B.$0
C.$1,150
D.$1,500 - CORRECT ANSWER A. $550Answer
Employees must include in gross income the amount of nonqualified plan awards and qualified plan awards exceeding
$1,600 for a tax year. Derek Dunn's $250 watch from the nonqualified plan would be fully excluded from income (under
$400) if the other two gifts had not been given. However, because the other two were given, the watch is added to the
total amount of gifts for the year. Therefore, the total included in his gross income is $550 [($250 + $1,500 + $400) -
$1,600 deduction].
During an all-employee awards ceremony, Exercycle Company gave Mollie a new bicycle for her outstanding safety
record. This award was presented to Mollie for her services to the company and in accordance with Exercycle's qualified
employee achievement awards program. The bicycle cost Exercycle $1,200 and has a fair market value of $1,700. What
amount must Mollie include in income?
A.$0
B.$1,700
C.$1,200
D.$500 - CORRECT ANSWER
Jerry, a general contractor by trade, is a tenant of Montgomery Apartments. In exchange for 4 months of rent
($500/month), Jerry provided the following items and services for Paul, the owner of the apartments: Paint and
miscellaneous supplies for the apartments$ 300Labor for painting and miscellaneous repairs700Labor and supplies for
paving the apartment parking area1,000How should Paul treat this transaction on his Schedule E?
Questions and CORRECT Answers
During the current year, Dave, a member of the clergy, received a salary of $14,000 and a house with a fair rental value of
$6,000 as pay for his duties as an ordained minister. Dave also was employed part-time as a limousine driver receiving a
salary of $3,000, tips of $1,000, and a Christmas bonus of $200. Dave became disabled in November and received $2,800
as a disability pension. He made no contributions to the pension. What amount must Dave include in gross income on his
current-year tax return?
A. $21,000
B.$26,800
C.$18,200
D.$27,000 - CORRECT ANSWER A.$21,000Answer
Under Sec. 61, salaries and fees for personal services are always included in gross income. A minister should include his
or her salary; the offerings given directly to him or her for marriages, baptisms, and funerals; tips; cash bonuses; and
pension benefits, when no personal contributions were made to the pension fund. Regulation 1.107-1 excludes from gross
income the rental value of a home, including utilities, furnished to a minister as a part of his or her compensation
(Publication 517). Dave must includeSalary$14,000Outside earnings3,000Tips1,000Bonus200Pension2,800Total$21,000
In Year 1, Lee was beginning his undergraduate education. In January of Year 1, Lee was awarded a scholarship of $500
per month from a tax-exempt educational foundation to continue as long as Lee was a full-time student until he received
his degree. Lee remained a full-time student and graduated at the end of August of Year 5. Lee received the scholarship
each month from January of Year 5 through August of Year 5, and spent $2,400 for tuition, fees, books, and supplies.
How much must Lee include in gross income from the scholarship in Year 5?
A.$1,600
B.$0
C.$2,400
D.$4,000 - CORRECT ANSWER A.$1,600Answer
candidate for a degree may exclude the amount received as a scholarship at an educational organization. There is no limit
on the time for which the scholarship may be received. Only amounts actually used for tuition, course-related fees, books,
supplies, and equipment required for instruction qualifies for this exclusion (Publication 17). Therefore, Lee needs to
include $1,600 in gross income from the scholarship as calculated below. Monthly payment$ 500 Times: Number of
payments× 8 Amount received$4,000 Less: Qualified expenditures(2,400)Gross income inclusion$1,600
William owns a four-unit apartment building for which he receives $500 per month per unit. Three of the units were
rented for the entire 12 months. The fourth unit was occupied from January 1 to April 30, Year 1. Upon vacating the unit,
the tenant was not refunded his security deposit of $500 due to damage to the unit. The unit was subsequently rented for 1
year beginning August 1, Year 1. On August 1, Year 1, the new tenant paid the first and last months' rent and a refundable
security deposit of $500. What is William's rental income for Year 1?
A.$23,000
B.$23,500
C.$22,500
D.$24,000 - CORRECT ANSWER B.$23,500Answer
All amounts received or accrued as rents are includible in income. Security deposits are income if and when the lessor
becomes entitled to the funds by reason of the lessee's violation of the terms of the lease. Advance rent received upon
execution of a lease is includible in gross income in the year received, whether the taxpayer is on the cash or the accrual
basis. For the current year, William must include $18,000 for the three units rented continuously during the year.
Although not specifically stated, it is presumed that William received rental income of $2,000 from unit four while it was
occupied for the first 4 months of the current year. The $500 security deposit of the first tenant in unit four is includible as
rental income because William became entitled to the funds to repair damages to the unit after the tenant vacated it.
William also received rental income of $3,000, which included $500 of prepaid rent, from the second tenant of unit four.
The refundable security deposit of $500 paid by the second tenant of unit four is not part of William's rental income for
the current year because William was not authorized to retain any portion of the deposit during the year (Publication 17).
, Fred received the following from his employer during the year: $25,000 regular wages, $5,000 cash bonus, trip valued at
$1,000, and parking valued at $100 per month at a lot adjacent to the office building. His employer contributed $200 per
month to a 401(k) plan for Fred. Fred chose not to set aside any of his pay for the retirement plan. How much income
should Fred report?
A.$31,000
B.$34,600
C.$33,400
D.$32,200 - CORRECT ANSWER A.$31,000
Publication 17 states that compensation for personal services, no matter what form of payment, must be included in gross
income. Wages, bonuses, and fringe benefits that do not qualify for exclusions are some examples of items included.
Parking is specifically listed as a qualified transportation fringe benefit under Sec. 132(f)(1) and (2). The $5,000 cash
bonus and the trip are included in his income; however, contributions to a 401(k), subject to a limitation that Fred does
not surpass, are not included. Therefore, his income is $31,000 ($25,000 regular wages + $5,000 cash bonus + $1,000 trip
value).
Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on
her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan
include in her gross income in connection with this award?
A.$0
B.$5,000
C.$10,000
D.$4,000 - CORRECT ANSWER C.$10,000Answer
Prizes and awards made primarily in recognition of charitable, scientific, educational, etc., achievement are excluded
from gross income only if the recipient was selected without any action on his or her part, is not required to render
substantial future services as a condition of receiving the prize or award, and assigns it to charity (Publication 17). Thus,
Joan cannot exclude any amount of the $10,000 award from gross income since she failed to assign it to charity.
Derek Dunn received three employee achievement awards during the year: a nonqualified plan award of a watch that cost
$250, two qualified plan awards of a computer that cost $1,500, and a radio that cost $400. The requirements for qualified
plan awards are satisfied. What amount, if any, must Derek include in income?
A.$550
B.$0
C.$1,150
D.$1,500 - CORRECT ANSWER A. $550Answer
Employees must include in gross income the amount of nonqualified plan awards and qualified plan awards exceeding
$1,600 for a tax year. Derek Dunn's $250 watch from the nonqualified plan would be fully excluded from income (under
$400) if the other two gifts had not been given. However, because the other two were given, the watch is added to the
total amount of gifts for the year. Therefore, the total included in his gross income is $550 [($250 + $1,500 + $400) -
$1,600 deduction].
During an all-employee awards ceremony, Exercycle Company gave Mollie a new bicycle for her outstanding safety
record. This award was presented to Mollie for her services to the company and in accordance with Exercycle's qualified
employee achievement awards program. The bicycle cost Exercycle $1,200 and has a fair market value of $1,700. What
amount must Mollie include in income?
A.$0
B.$1,700
C.$1,200
D.$500 - CORRECT ANSWER
Jerry, a general contractor by trade, is a tenant of Montgomery Apartments. In exchange for 4 months of rent
($500/month), Jerry provided the following items and services for Paul, the owner of the apartments: Paint and
miscellaneous supplies for the apartments$ 300Labor for painting and miscellaneous repairs700Labor and supplies for
paving the apartment parking area1,000How should Paul treat this transaction on his Schedule E?
