ACCT 3221 MC EXAM 2 QUESTIONS AND ANSWERS
100% CORRECT
Which of the following is not an example of an item of income that is tax-exempt under
the recovery of capital principle?
a. The collection of the principal amount of a note receivable does not result in income.
b. Sale of an asset for exactly its adjusted basis results in no gain or loss.
c. Personal injury awards for loss of reputation are tax-free.
d. Collection of radio station prize money is excluded because it is not income -
ANSWER d
Joan Hain received the following awards in a court settlement from an insurance
carrier:
Personal damage award for physical injury . . . . . . . . . $ 75,000
Payment for loss of wages . . . . . . . . . . . . . . . . . . . . . . 10,000
Punitive damage due to negligence . . . . . . . . . . . . . . . 12,000
How much gross income does Joan have from the above?
a. $75,000
b. $97,000
c. $22,000
d. $10,000 - ANSWER c
Which of the following is not true of the determination of gross income?
a. A partner's gross income includes his or her share of the partnership's gross income.
b. A child's earnings, even if received by a guardian, are taxable to the child.
c. Community earned income may be treated as separate income by a person who does
not live with his or her spouse and meets several other tests.
d. Income from community property may be treated as separate income by a person
, who does not live with his or her spouse and meets several other tests. - ANSWER d
Which of the following is not true of partnership tax years?
a. The partnership elects its own tax year, even if its partners do not all use the same
taxable year.
b. Normally, the partnership must use the calendar year.
c. Generally, a partner does not report income in excess of that distributed to him or her
during the tax year.
d. All income, deductions, gains, losses, credits, and other items that pass through to
the partners pass through on the last day of the partnership tax year. - ANSWER c
Which of the following is true of acceptable accounting methods for income tax
purposes?
a. Interest and rental income must be reported on the accrual method.
b. All forms of income must be reported using the same accounting method.
c. Sales and cost of sales must be reported using the accrual method.
d. The cash method is only available for reporting deductions - ANSWER c
Which of the following is not required for income to be reported by a cash method
taxpayer under the constructive receipt doctrine?
a. The taxpayer has control over the amount without major restrictions.
b. The amount has been set aside for the taxpayer.
c. The funds are available for payment.
d. The payment will ultimately be made with cash. - ANSWER d
Which of the following taxpayers is allowed to use the cash method of accounting for tax
purposes?
a. An incorporated medical practice (C corporation) with average gross receipts of $30
million.
b. A partnership required to register as a tax shelter.
100% CORRECT
Which of the following is not an example of an item of income that is tax-exempt under
the recovery of capital principle?
a. The collection of the principal amount of a note receivable does not result in income.
b. Sale of an asset for exactly its adjusted basis results in no gain or loss.
c. Personal injury awards for loss of reputation are tax-free.
d. Collection of radio station prize money is excluded because it is not income -
ANSWER d
Joan Hain received the following awards in a court settlement from an insurance
carrier:
Personal damage award for physical injury . . . . . . . . . $ 75,000
Payment for loss of wages . . . . . . . . . . . . . . . . . . . . . . 10,000
Punitive damage due to negligence . . . . . . . . . . . . . . . 12,000
How much gross income does Joan have from the above?
a. $75,000
b. $97,000
c. $22,000
d. $10,000 - ANSWER c
Which of the following is not true of the determination of gross income?
a. A partner's gross income includes his or her share of the partnership's gross income.
b. A child's earnings, even if received by a guardian, are taxable to the child.
c. Community earned income may be treated as separate income by a person who does
not live with his or her spouse and meets several other tests.
d. Income from community property may be treated as separate income by a person
, who does not live with his or her spouse and meets several other tests. - ANSWER d
Which of the following is not true of partnership tax years?
a. The partnership elects its own tax year, even if its partners do not all use the same
taxable year.
b. Normally, the partnership must use the calendar year.
c. Generally, a partner does not report income in excess of that distributed to him or her
during the tax year.
d. All income, deductions, gains, losses, credits, and other items that pass through to
the partners pass through on the last day of the partnership tax year. - ANSWER c
Which of the following is true of acceptable accounting methods for income tax
purposes?
a. Interest and rental income must be reported on the accrual method.
b. All forms of income must be reported using the same accounting method.
c. Sales and cost of sales must be reported using the accrual method.
d. The cash method is only available for reporting deductions - ANSWER c
Which of the following is not required for income to be reported by a cash method
taxpayer under the constructive receipt doctrine?
a. The taxpayer has control over the amount without major restrictions.
b. The amount has been set aside for the taxpayer.
c. The funds are available for payment.
d. The payment will ultimately be made with cash. - ANSWER d
Which of the following taxpayers is allowed to use the cash method of accounting for tax
purposes?
a. An incorporated medical practice (C corporation) with average gross receipts of $30
million.
b. A partnership required to register as a tax shelter.
